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Value Traps


rockket
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  • 4 weeks later...

All of the Life Insurers are value traps in the current market.  Take a look at MET, PRU, etc. or for really cheap, look at the small ones like NWLI or KCLI.

 

They are all at sub-10 p/e's a large discount to book value and tangible book value.  They are cheap relative to the market and cheap to where they traded prior to the financial crisis.

 

But they refuse to move unless interest rates move up.  Every time we see a hint of rates going up, like today, they jump (eg. MET up 5% today), but they get pushed right back down again if rates fall.

 

When we do see the catalyst of rising interest rates, they will go, but in the meantime, you get to own a business with growing book values, cheap earnings and some dividends,

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  • 2 weeks later...

I'd nominate RAFI as a value trap. There is a write up on VIC that gives basic premise.

 

Since that time they did a nonsensical rights offering to buy a mediocre business for an expensive price. So...not good!

 

But they still will be re leasing and refinancing 50% owned government building worth $100+ million by 2018 and probably sooner. A successful re leasing/refinancing could provide $50 million to RAFI which has a market cap of $45 million.

 

So catalyst imminent and a stock overhang from recent rights offering at $8.25.

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All of the Life Insurers are value traps in the current market.  Take a look at MET, PRU, etc. or for really cheap, look at the small ones like NWLI or KCLI.

 

They are all at sub-10 p/e's a large discount to book value and tangible book value.  They are cheap relative to the market and cheap to where they traded prior to the financial crisis.

 

But they refuse to move unless interest rates move up.  Every time we see a hint of rates going up, like today, they jump (eg. MET up 5% today), but they get pushed right back down again if rates fall.

 

When we do see the catalyst of rising interest rates, they will go, but in the meantime, you get to own a business with growing book values, cheap earnings and some dividends,

 

How are they value traps? If the business is performing well and they are priced cheaply, isn't that kind of the opposite?

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Maybe a good idea would be to list characteristics common to value traps?

 

1) Companies with assets that may be valuable, but aren't producing positive cash flow (LUK, SHLD, lots of other companies that trade under tangible book)

 

2) Companies that are facing macro headwinds (life insurers, banks)

 

3) Complex sum of the parts stories that the market has trouble appreciating (Leucadia again, Interactive Corp)

 

4) Companies with ineffective management

 

5) Companies with slowly shrinking revenue and/or operating profits

 

The more I think about it, the concept of value traps seems problematic. Many of the companies commonly described as value traps seem to have little in common besides "the share price didn't go up when I wanted it to."

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