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How To Avoid Value Traps



  • Identifies twelve factors that characterize value traps, and explains each one.
  • Explains the testing procedures used to arrive at these factors.
  • Constructs an investing system that’s heavily geared toward value stocks but largely avoids value traps.
  • Names ten extremely low-priced companies whose prices are likely to rise.
  • Looking for more? I update all of my investing ideas and strategies to members of The Stock Evaluator. Start your free trial today »

A value trap is a relatively cheap stock whose price simply doesn’t rise no matter how long you hold it. I’ve done a research study of factors that might characterize value traps, and here are the ones that I think provide the best warning signs. After going through these factors, I’ll tell you how I performed the study, describe some systems that incorporate these factors, give their performance, and recommend some value stocks that I think are not value traps.

  1. Avoid companies who file late. The SEC has set deadlines for company filings; most companies must file a 10-Q within 40 days of the end of their fiscal quarter, though companies with a market cap of less than $75 million can take up to 45 days. After that, companies need to file a form NT (for “Non-Timely”), which will give them a five-day grace period. If a company doesn’t file a form NT or takes more than the five days given, it may face deregistration, delisting, and an inability to raise capital. In general, companies who are late with a quarterly or annual filing tend to do poorly over the next few months, lagging the S&P 500 by an average of more than 2% annually.
  2. Avoid companies with negative or very low unlevered free cash flow. Unlevered free cash flow is cash flow from operating activities plus after-tax interest expenditures minus capital expenditures. If a company’s unlevered free cash flow is less than 2% of its enterprise value (the sum of its market cap, non-controlling interest, preferred equity, and debt minus its cash on hand), it’s going to be hard for it to grow enough to escape value-trap status.
  3. Avoid any company whose negative cash flow from investing activities is a lot bigger than its cash flow from

My marketplace service,The Stock Evaluator, takes all these factors into account in its weekly comprehensive ranking of over 4,000 stocks. It will definitely help you avoid value traps!

This article was written by

Yuval Taylor profile picture
Weekly evaluation of thousands of stocks based on sound financial metrics.

I am the author of Zora and Langston: A Story of Friendship and Betrayal, as well as other books. In my spare time I invest, primarily in microcaps; investigate investment conundrums; and write about my investigations on Seeking Alpha and on my blog, http://backland.typepad.com/investigations.

I offer a subscription service, The Stock Evaluator, which sends out weekly rankings for close to 10,000 stocks and also tracks my own portfolio; you can reach it here: https://seekingalpha.com/author/yuval-taylor/research.

I'm proud of my investing track record. In 2016, I made 45% on my investments; in 2017, 58%; in 2018, 14%; in 2019, 16%; in 2020, 105%; in 2021, 73%; and in 2022, 22%. 

Analyst’s Disclosure: I am/we are long SCX, PERI, NTWK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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