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So which securities would you say are (at this time) "value traps"?


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Eastman Kodak is a well known value trap but what are some others to avoid?

 

Some "pundits" claim the big American banks and Berkshire are value traps:

 

http://globaleconomicanalysis.blogspot.com/2011/06/value-traps-galore-including-financials.html

 

Buffet Already Bought

 

Of course Buffett would buy. He already did.

 

The mistake is thinking that "values" of the past decade constitute real value that the market will recognize anytime soon.

 

Take a look at Citigroup. Yahoo Finance reports Citigroup Trades at Price/Book of .64

 

Lovely. Had you bought at price to book of 1.0 (a tremendous "value" to many) you would be 36 percent in the hole.

 

Take a look Bank of America. Yahoo Finance reports Bank of America Trades at Price/Book of .50

 

Had you bought Bank of America at "book value" you would be down 50%.

 

Had you bought Citigroup near its peak you would be down 90% or more with a 0% chance of ever getting even.

 

 

 

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Any company that is trading at a low multiple but has a business model impairment and will be in a secular decline:

Garmin, Gamestop, most newspapers, the yellowpages (SuperMedia and DexOne), etc...

 

Companies that are trading at low multiples but the "E" consists of fairy dust:

All the China RTO's, Life Partners Holdings, etc...

 

Companies with low multiples but are in a rapidly changing industry and will have to change their business model for the better or worse eventually (these are highly disputable, and can be big winners if they get the new technology right):

RIMM, Nokia, eventually maybe even Apple?, etc...

 

Companies with low multiples but have cyclically high earnings:

The Banks/homebuilders pre 2008, Most building materials stocks exporting to China, for profit colleges, Etc...

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PRXI maybe, the court gave them in specie award this Monday but if they can't find a suitable buyer then it'z a value trap

 

  They can still turn around on the operations side and since they hired a new CFO who has experience in the media business. I am sure they will make things work for them. This past quarter they made a profit.

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The S&P500 traded as high as 1,134 in April 1998; today it is trading at 1,191. 13 years later the average is flat with inflation running 2 to 3% per year. Grantham says fair value for the S&P is 950; perhaps the bear market is not over yet.

 

Does this mean most stocks in the S&P have been value traps for the past 13 years? Should the bear market continue for another 5 or 6 years (normal when looking at history) does this mean most stocks remain value traps?

 

Clearly, the market multiple (what Mr Market is willing to pay) is coming down over time. Should this continue then most stocks will remain value traps.

 

The key lesson in all this to me is the importance of margin of safety when investing. And patience. And the value of having cash.

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Any company that is trading at a low multiple but has a business model impairment and will be in a secular decline:

Garmin, Gamestop, most newspapers, the yellowpages (SuperMedia and DexOne), etc...

 

Companies that are trading at low multiples but the "E" consists of fairy dust:

All the China RTO's, Life Partners Holdings, etc...

 

Companies with low multiples but are in a rapidly changing industry and will have to change their business model for the better or worse eventually (these are highly disputable, and can be big winners if they get the new technology right):

RIMM, Nokia, eventually maybe even Apple?, etc...

 

Companies with low multiples but have cyclically high earnings:

The Banks/homebuilders pre 2008, Most building materials stocks exporting to China, for profit colleges, Etc...

 

Great post.

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Any company that is trading at a low multiple but has a business model impairment and will be in a secular decline:

Garmin, Gamestop, most newspapers, the yellowpages (SuperMedia and DexOne), etc...

 

Companies that are trading at low multiples but the "E" consists of fairy dust:

All the China RTO's, Life Partners Holdings, etc...

 

Companies with low multiples but are in a rapidly changing industry and will have to change their business model for the better or worse eventually (these are highly disputable, and can be big winners if they get the new technology right):

RIMM, Nokia, eventually maybe even Apple?, etc...

 

Companies with low multiples but have cyclically high earnings:

The Banks/homebuilders pre 2008, Most building materials stocks exporting to China, for profit colleges, Etc...

 

You win today's "Most Valuable Post" Award!

 

Prize:

 

1000 shares of CSKI!!

 

http://www.google.com/finance?client=ob&q=NASDAQ:CSKI

 

But seriously, thanks! :)

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Eastman Kodak is a well known value trap but what are some others to avoid?

 

Some "pundits" claim the big American banks and Berkshire are value traps:

 

http://globaleconomicanalysis.blogspot.com/2011/06/value-traps-galore-including-financials.html

 

Buffet Already Bought

 

Of course Buffett would buy. He already did.

 

The mistake is thinking that "values" of the past decade constitute real value that the market will recognize anytime soon.

 

Take a look at Citigroup. Yahoo Finance reports Citigroup Trades at Price/Book of .64

 

Lovely. Had you bought at price to book of 1.0 (a tremendous "value" to many) you would be 36 percent in the hole.

 

Take a look Bank of America. Yahoo Finance reports Bank of America Trades at Price/Book of .50

 

Had you bought Bank of America at "book value" you would be down 50%.

 

Had you bought Citigroup near its peak you would be down 90% or more with a 0% chance of ever getting even.

 

 

 

 

Didn't notice today's 22% jump in EK when I posted this...

 

Maybe this is the beginning of a long ride up in the shares? 

 

Nah. ;)

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Value Trap?  Sears Holding! 

 

Unless Eddie can liquidate some of the commercial land and other assets (Craftsmen), this one is a trap.  Their department store business is dying. 

 

While it generates free cash flow, it is in a slow, deteriorating drop with it's core customers slowly disappearing...those born before 1970.  Those born after aren't buying there anymore.  Their catalog business has too much to compete with online.  It's a cigar butt and has been for the last few years.  But the last puff is one really long painful one! 

 

If he can take the cash flows and invest elsewhere, great!  But so far he's overpaid for stock buybacks, and spent the rest keeping this sucker afloat.  Buyer beware!  Cheers!   

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Value Trap?  Sears Holding!  

 

Unless Eddie can liquidate some of the commercial land and other assets (Craftsmen), this one is a trap.  Their department store business is dying.  

 

While it generates free cash flow, it is in a slow, deteriorating drop with it's core customers slowly disappearing...those born before 1970.  Those born after aren't buying there anymore.  Their catalog business has too much to compete with online.  It's a cigar butt and has been for the last few years.  But the last puff is one really long painful one!  

 

If he can take the cash flows and invest elsewhere, great!  But so far he's overpaid for stock buybacks, and spent the rest keeping this sucker afloat.  Buyer beware!  Cheers!    

 

For sure. I posted this in the SHLD thread a month or two ago, but my thought is for him to liquidate the retail stores and use the cash to build a portfolio of brands (to go along with their brands such as DieHard and Kenmore) and work on distributing them through other retailers. They unfortunately own some bad brands to go along with the better ones.

 

 

 

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For sure. I posted this in the SHLD thread a month or two ago, but my thought is for him to liquidate the retail stores and use the cash to build a portfolio of brands (to go along with their brands such as DieHard, Kenmore, Craftsman) and work on distributing theme through other retailers. They unfortunately own some bad brands to go along with the better ones.

 

I was born 1969 and my brother was born 1981.  I shop at Sears, and it's actually the first place I head to when I need a new appliance because of the Kenmore brand.  But my brother does not really shop at Sears because of the brand at all, and he's unlikely to shop there unless I tell him to go there.  And Sears Canada does a better job than Sears USA when advertising, promoting and reinforcing their brand here. 

 

I can only imagine how tough it is for Sears in the U.S.  Target is only coming here now and Wal-mart had strict restrictions against them in various municipalities for many years.  That is changing.  Sears Canada is going to face the same competition that Sears USA has had to face.  The generations after me have no inclination to shop at Sears. 

 

I still get all of their catalogues every year, but I know of hardly anyone else who still does.  Either they revamp the model completely...which hasn't worked in several attempts...or they dis-assemble the pieces, reinvest the cash, and keep the core business in a scaled down model.  They have to do something, because nothing else is remotely working!  Cheers! 

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Value Trap?  Sears Holding! 

 

Unless Eddie can liquidate some of the commercial land and other assets (Craftsmen), this one is a trap.  Their department store business is dying. 

 

While it generates free cash flow, it is in a slow, deteriorating drop with it's core customers slowly disappearing...those born before 1970.  Those born after aren't buying there anymore.  Their catalog business has too much to compete with online.  It's a cigar butt and has been for the last few years.  But the last puff is one really long painful one! 

 

If he can take the cash flows and invest elsewhere, great!  But so far he's overpaid for stock buybacks, and spent the rest keeping this sucker afloat.  Buyer beware!  Cheers!   

 

Fairholme?

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Value Trap?  Sears Holding! 

 

Unless Eddie can liquidate some of the commercial land and other assets (Craftsmen), this one is a trap.  Their department store business is dying. 

 

While it generates free cash flow, it is in a slow, deteriorating drop with it's core customers slowly disappearing...those born before 1970.  Those born after aren't buying there anymore.  Their catalog business has too much to compete with online.  It's a cigar butt and has been for the last few years.  But the last puff is one really long painful one! 

 

If he can take the cash flows and invest elsewhere, great!  But so far he's overpaid for stock buybacks, and spent the rest keeping this sucker afloat.  Buyer beware!  Cheers!   

 

Another great post. This is what I have thought about this stock, I watch because I figure he has to have something planned....

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WOW this is corner of BERKSHIRE. Berkshire Hathaway was one of the worst value traps of all time yet a great capital allocater was able to spin the miserable declining cash flow of that dying business into one of the greatest piles of dough in the history of man. Warren will admit he should not have bought BRK and also says that when a business with a bad reputation is combined with an operater with a great reputation it is typically the business whose reputation is intact. As value investors you are always going to have some investments in your portfolio that MR. mkt feels for one reason or another are dogs which is just another name for value trap IMO. Stuff gets cheap (margin of saftey) because Mr mkt in his infinite wisdom says that the problems are permanent. I would like to remind some that AAPL was once a dog

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WOW this is corner of BERKSHIRE. Berkshire Hathaway was one of the worst value traps of all time yet a great capital allocater was able to spin the miserable declining cash flow of that dying business into one of the greatest piles of dough in the history of man. Warren will admit he should not have bought BRK and also says that when a business with a bad reputation is combined with an operater with a great reputation it is typically the business whose reputation is intact. As value investors you are always going to have some investments in your portfolio that MR. mkt feels for one reason or another are dogs which is just another name for value trap IMO. Stuff gets cheap (margin of saftey) because Mr mkt in his infinite wisdom says that the problems are permanent. I would like to remind some that AAPL was once a dog

 

Totally true.  But madness is doing the same thing over and over, and believing you will get different results.  Eddie hasn't done anything different yet. 

 

Buffett did something totally different by reallocating the cash flows, as did Steve Jobs when he came back to Apple.  Would the old Jobs have taken a cash infusion from Bill Gates?  Nope!  This one did. 

 

If Eddie wants to save Sears, he has to do something completely different.  What he has been doing has done nothing to save the value of the company...and that's because the model as is will not be competitive.  He should not pour another dime into the business other than the bare minimum necessary.  Cheers!

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Value traps lose both stock value AND intrinsic value. Not sure what the author is referring too..

And if you have to wait for Mr market to recognize iv, just sit on your hands and let iv compound over the years?  ???

 

Not sure how his "reversion to the mean of profit margins" is an argument against value traps as all companies would face the same faith. Funny enough, banks, insurance companies and a lot of companies with competitive advantages will probably suffer a lot less from this "reversion to the mean of profit margins".

 

A real pundit indeed!  ::)

 

 

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Value Trap?  Sears Holding! 

 

Unless Eddie can liquidate some of the commercial land and other assets (Craftsmen), this one is a trap.  Their department store business is dying. 

 

While it generates free cash flow, it is in a slow, deteriorating drop with it's core customers slowly disappearing...those born before 1970.  Those born after aren't buying there anymore.  Their catalog business has too much to compete with online.  It's a cigar butt and has been for the last few years.  But the last puff is one really long painful one! 

 

If he can take the cash flows and invest elsewhere, great!  But so far he's overpaid for stock buybacks, and spent the rest keeping this sucker afloat.  Buyer beware!  Cheers!   

 

I've been an owner of SHLD for several years.  Until the last 6ish months, I would have strongly disagreed with this notion.  The primary reason being the consistent cash flow provided by operations.  Despite all the negative sentiment about the company, they had been able to produce about a billion dollars in free cash flow each year, and even did reasonably well in 2009.  The past year's results have been a different story, and it's not clear the the retail operations will return to delivering strong positive cash flows.  So, my disagreement is mild at best.  :)

 

I always viewed the real estate valuation to be a worst case, which wasn't that important if the stores continued as a positive source of income.  I'm no longer convinced that SHLD, as a retail operation can be long-term profitable, which leaves brand licensing and Lampert's financial prowess to add value.  Neither of those are a sure thing, and the real estate can't be easily monetized in the current environment.  While I don't see bankruptcy as a real possibility right now, I do see a slow and persistent decline in operations and tangible value as a likely outcome.  However, it wouldn't surprise me if SHLD sold one or two more secondary pieces (like Orchard) and used the proceeds for Lampert to take it private.  But, that's just speculation at this point.

 

Even at $60 it's not that attractive, but I do continue to hold a small amount (much smaller than it used to be).  So, maybe I don't really disagree at all, and I'm just anchored to my purchase price and historical valuation estimates which keep me from selling the last bit I still own.

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Hi Zarley,

 

I also had the same feelings with Sears for many years (owned it briefly a couple of years ago, but replaced it with SHLD debt in 2008).  

 

The cash flows have been robust.  The brands have some value, as does all of the real estate.  If the credit crunch happened a couple of years later, and Eddie had been able to liquidate some of the property before the crash, then it might have been a different story.  Instead, they've poured a couple of billion into share buybacks and revamping the stores.  It hasn't worked.  

 

They still could salvage the whole thing by reallocating cash flows and selling off assets over time, but they haven't indicated that they plan on doing that.  So far, they think the department store business can be restored.  I have a hard time believing that.  Cheers!

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Sears Holding for sure.  Buffett used the cash from Berk quickly to buy the Insurance companies.  Within a few years of taking over Berk he had issued bonds, bought Insurance companies, used these to buy Blue Chip, Wesco, all before any of us could have bought Berk because it traded by appointment only.  Lampert has not shown in nearly 10 years that he is doing anything to diversify Sears from its model.

 

Fibrek, formerly sfk pulp, is starting to fit the mould - they will have things sorted out by the time the next big down cycle hits.  I have to wonder how bad the demand for pulp may get with the advent of tablets and more and more free Wi-fi.  They are going to need some Capex infusion sooner or later to remodel plants that are wearing down.

 

Torstar has traded sideways for years and shows no signs of innovation, financial or otherwise.  

 

Recall Liquidation World - now part of Big Lots.  $5.00 in 2008 got you 0.30 in 2011.

 

BAM - needs to raise it's dividend to 4% and implement progress dividend increases.

 

Overstock.com

 

I have held all of the above.  One I have avoided:

 

TRI.

 

The point about the S&P500 is interesting.  Shows the advantage of being disciplined and selling/reducing as things rise and waiting for a retraction.  

 

Would AAPL have ever looked like a value stock I wonder or has it always looked overvalued at any time in history.  I dont think anyone could have predicted that AAPL would have succeeded the way it has.

 

Things that look like value traps but probably just require patience:  US banks, GE, KFT, JNJ - the banks when they free up of the mortgage morass may look like they have rocket fuel under them.  

 

Al.

 

 

 

 

 

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The department store model maybe in a slow runoff but Eddie is doing a good job of not wasting money there. He is rapidly increasing the amount of franchises, bought most of Sears Canada, and buying back stock.

 

They've spent $1.6B over the last three years on capex, so if he's not pouring it into the stores, where is it going?  Sears Canada was better off than Sears USA, but it is going to run up against stiff competiton for the forseeable future.  Buying Sears Canada may prove to be a poor decision, when that cash could have been invested elsewhere.  Instead, they're burning through the cash in Sears Canada too!  Revenues keep dropping, shareholder equity keeps dropping, debt has increased dramatically...slow burn!  

 

My opinion remains:  Pour money into investment ideas or other businesses; runoff the underperforming stores; sell off properties in bulk as values stabilize or start to increase; license core brands to other retailers (Craftsmen, Kenmore, etc); eliminate paper catalog business and move everything online; decrease store footprint and reduce number of inventory items; reduce operating expenses to the bone.  Cheers!

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Sears Holding for sure.  Buffett used the cash from Berk quickly to buy the Insurance companies.  Within a few years of taking over Berk he had issued bonds, bought Insurance companies, used these to buy Blue Chip, Wesco, all before any of us could have bought Berk because it traded by appointment only.  Lampert has not shown in nearly 10 years that he is doing anything to diversify Sears from its model.

 

Fibrek, formerly sfk pulp, is starting to fit the mould - they will have things sorted out by the time the next big down cycle hits.  I have to wonder how bad the demand for pulp may get with the advent of tablets and more and more free Wi-fi.  They are going to need some Capex infusion sooner or later to remodel plants that are wearing down.

 

Torstar has traded sideways for years and shows no signs of innovation, financial or otherwise.  

 

Recall Liquidation World - now part of Big Lots.  $5.00 in 2008 got you 0.30 in 2011.

 

BAM - needs to raise it's dividend to 4% and implement progress dividend increases.

 

Overstock.com

 

I have held all of the above.  One I have avoided:

 

TRI.

 

The point about the S&P500 is interesting.  Shows the advantage of being disciplined and selling/reducing as things rise and waiting for a retraction.  

 

Would AAPL have ever looked like a value stock I wonder or has it always looked overvalued at any time in history.  I dont think anyone could have predicted that AAPL would have succeeded the way it has.

 

Things that look like value traps but probably just require patience:  US banks, GE, KFT, JNJ - the banks when they free up of the mortgage morass may look like they have rocket fuel under them.  

 

Al.

 

 

 

 

 

I purchased AAPL for 8.00 per share it had net cash at that time of around 4.00 per share its moat was a rabid customer base. AAPLE users swore by the companies products. I never had used a MAC but I had customers who did and they swore by them. Warren spent more than a few years trying to turn Berkshire's business around if the the history books are in fact true. It is also worth noting that Warren is investing billions and billions today give him 100,000,000.00 or less to invest  and more than 20 years of life expectancy which prolly covers most of us here and he would be back to the old play book cigar butts, net nets, special situations, workouts ,arbitrage etc. My point is that there is a price for BAC and Sears and EK where it makes sense to be an owner. I reached it on BAC  not so sure on Sears and EK.
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They've spent $1.6B over the last three years on capex, so if he's not pouring it into the stores, where is it going?  Sears Canada was better off than Sears USA, but it is going to run up against stiff competiton for the forseeable future.  Buying Sears Canada may prove to be a poor decision, when that cash could have been invested elsewhere.  Instead, they're burning through the cash in Sears Canada too!  Revenues keep dropping, shareholder equity keeps dropping, debt has increased dramatically...slow burn!  

 

My opinion remains:  Pour money into investment ideas or other businesses; runoff the underperforming stores; sell off properties in bulk as values stabilize or start to increase; license core brands to other retailers (Craftsmen, Kenmore, etc); eliminate paper catalog business and move everything online; decrease store footprint and reduce number of inventory items; reduce operating expenses to the bone.  Cheers!

 

Its actually 1.3 billion spent on cap ex over the last 3 years on 4000 stores which works out to about 325,000 per location and that is without consideration for the money they spent on i.t, logistics etc.  Revenue and cashflow are strongly tied with new housing starts and I think they'll look much healthier, and Eddie a lot smarter, once the U.S gets back to 1.2m vs the 600k we have today.  

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