Investing term
What is Value trap?
A stock that looks cheap on a backward-looking multiple but is cheap for a reason — the business is impaired.
A value trap is a stock that looks cheap on backward-looking measures but is cheap for a reason — the underlying business is in lasting decline. The low multiple tempts bargain-hunters, but earnings keep shrinking and the "cheap" price keeps falling. Avoiding value traps is why value investing requires judging the future of the business, not just its current ratios.
For example
A declining print-media company at a P/E of 6 looks like a bargain, but its profits keep eroding year after year — a textbook value trap.
Value trap is taught hands-on in Stage 15 — Valuation for Investors.
See the lesson →