{"id":108555,"date":"2017-07-06T10:49:17","date_gmt":"2017-07-06T14:49:17","guid":{"rendered":"http:\/\/countingpips.com\/?p=108555"},"modified":"2017-07-06T06:50:16","modified_gmt":"2017-07-06T10:50:16","slug":"premature-ignition-hit-wall-street","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/07\/premature-ignition-hit-wall-street\/","title":{"rendered":"Premature Ignition Hit Wall Street"},"content":{"rendered":"<div id=\"inves-1848354704\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">July 6, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_wallstreet_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_wallstreet_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/07\/0717_wallstreet_feature-300x155.jpg 300w\" alt=\"Premature Ignition Hit Wall Street\" width=\"580\" height=\"300\" \/><\/p>\n<ul>\n<li>Fireworks ignited early for Wall Street this year\u2026<\/li>\n<li>Market\u2019s new highs make bargain-hunting difficult.<\/li>\n<li>Here\u2019s what NOT to do.<\/li>\n<li><strong><a href=\"https:\/\/pro.agorafinancial.com\/m\/706772\" target=\"_blank\" rel=\"noopener\">Also recommended: Bitcoin meets its match.<\/a><\/strong><\/li>\n<\/ul>\n<hr \/>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>Fireworks ignited one day early on Wall Street this year.<\/p>\n<p>The market kicked off the second half of the year on a positive note, with the Dow reaching an all-time high on July 3.<\/p>\n<p>Granted, July 3 is usually a solid day for stocks. Since 1928, the S&amp;P has generated positive returns 73% of the time, according to Bespoke Investment Group.<\/p>\n<p>But the overall momentum in the market is tough to ignore. And as the upward trajectory continues, it\u2019s getting more difficult to find cheap stocks.<\/p>\n<p>Be careful, though!<\/p><div id=\"inves-1752350303\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>As investors get increasingly desperate to find a bargain, they tend to fall for \u201cvalue traps.\u201d That is, stocks that appear cheap on the surface \u2014 but are actually fundamentally unsound.<\/p>\n<p>That doesn\u2019t mean you should just give in and buy stocks at all-time highs, though.<a name=\"video\"><\/a><\/p>\n<p>I asked senior analyst Martin Hutchinson to take a deeper dive into value traps. Check out his full analysis below to see how to avoid falling for them in the coming weeks.<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, <em>Wall Street Daily<\/em><\/p>\n<hr \/>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 57.0% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_yuv00cbz8i videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p><strong>Question:<\/strong> Martin, you\u2019ve agreed to help us compile a library of the most important investment catalysts on Earth.<\/p>\n<p>These are baseline concepts that every investor should know. And today we\u2019ll be discussing value traps and how low stock prices can appear so attractive to investors.<\/p>\n<p>Let\u2019s jump right in, Martin. Why are beaten-down shares in some cases a trap?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Well, it\u2019s interesting. Value traps are shares that appear to be cheap because the stock is trading at a low P\/E multiple, price-to-book multiple or cash flow multiple. But then they <em>stay<\/em> cheap \u2014 or move cheaper \u2014 because of fundamental unsoundness, which is the general reason why something\u2019s a value trap.<\/p>\n<p>There are a number of reasons why cheap stocks can turn out to be value traps.<\/p>\n<p>Firstly, the sector can be doomed because of new competition. Like retail now, which I don\u2019t think is completely doomed but certainly has doom around it.<\/p>\n<p>Second, earnings can be inflated because of temporary conditions. Like oil companies in 2013 (when oil was $100 a barrel).<\/p>\n<p>A good example of this is a company called Thompson Creek, which I bought in 2011.<\/p>\n<p>It was a molybdenum mine that had consistently good earnings and was then selling on five times multiple P\/E ratio. It had just bought a new copper and gold mine.<\/p>\n<p>However, molybdenum prices turned out to be in a bubble. Who knew? It fell below production cost. The copper and gold mine took 50% more than budgeted to build. The company loaded up with debt, closed the molybdenum mines and the copper and gold mine couldn\u2019t pay the debt.<\/p>\n<p>Eventually, I sold for a tenth of my buy price in 2016. That\u2019s a very good example of a value trap.<\/p>\n<p>Then also the company may be too small to attract institutional interest or it may have no catalyst that makes stock prices rise.<\/p>\n<p><strong>Question:<\/strong> Now, Hutch, there\u2019s a psychological component at play here for sure, particularly when we\u2019re in a bull market.<\/p>\n<p>The nature of investors is they just want to buy low, sell high. So they try to buy a stock that fits.<\/p>\n<p>But you have to ask yourself\u2026 In the middle of a bull market if a stock is trading on the low end of things, something\u2019s likely fundamentally wrong, right?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Something may well be fundamentally wrong but there are some sectors that just go out of fashion for some reason. It\u2019s difficult to tell.<\/p>\n<p>I distinguish between two different types of value traps. There are ones that are on the way to bankruptcy and ones that just sit there.<\/p>\n<p>People talk about a company that just sits there being a value trap. And obviously when everything else goes up, to some extent it is.<\/p>\n<p>But the ones that just sit there can be a very good investment if they pay a good dividend. After all, that\u2019s what investment was all about until the 1950s. You didn\u2019t look for capital gains; you looked for dividend. You\u2019ve got to remember the other way around.<\/p>\n<p>High-price stocks often fall without doing anything wrong. There\u2019s nothing wrong with a cheap stock that stays cheap.<\/p>\n<p>The real trap is where the business is unsound or earnings depend on a temporarily inflated price \u2014 such as oil in 2013 or molybdenum in 2010\/2011.<\/p>\n<p>The term \u201cvalue trap\u201d is often used by people trying to sell you growth stocks. They make value stocks seem more dangerous than they are.<\/p>\n<p>You have to remember that fundamentally cheap is good. With the value trap concept, it\u2019s useful to remember that there can be dangers. But there aren\u2019t always dangers.<\/p>\n<p><strong>Question:<\/strong> But it\u2019s a worthwhile endeavor to try to find good prices out there.<\/p>\n<p>There may be actually some values in a bull market out there where stocks for some reason are lagging behind other stocks.<\/p>\n<p>In other words, all stocks that are trading down aren\u2019t value traps. There are some hidden gems out there. Am I correct on that?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Absolutely, and my belief is looking for those is likely to do you much better in the long run than chasing the ones that are going up all the time.<\/p>\n<p><strong>Question:<\/strong> Is it safe to say that you\u2019re just basically flipping what you said about how to avoid a value trap? You\u2019re basically just flipping that?<\/p>\n<p>You\u2019re looking for companies that are beaten down but are fundamentally sound companies, is that correct?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Yes, that\u2019s correct but always remember the concept of a value trap. In other words, look for the snags before you buy.<\/p>\n<p><strong>Question:<\/strong> OK, so there are companies in this bull market that are trading way behind the market and lagging. So before you jump in those, make sure that you\u2019re not jumping right into a value trap.<\/p>\n<p>I\u2019ll give you the final word, Hutch.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> I think that\u2019s absolutely right. The concept of value traps is useful to remember, that there\u2019s danger out there even in cheap stocks.<\/p>\n<p><strong>Question:<\/strong> Thanks for your time today, Hutch.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Great to be with you.<\/p>\n<p><strong>Question:<\/strong> This is <em>Wall Street Daily<\/em>, signing off.<\/p>\n<p>Good investing,<\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <i>Wall Street Daily<\/i><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/07\/06\/premature-ignition-hit-wall-street\/\" rel=\"nofollow\">Premature Ignition Hit Wall Street<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com Fireworks ignited early for Wall Street this year\u2026 Market\u2019s new highs make bargain-hunting difficult. Here\u2019s what NOT to do. Also recommended: Bitcoin meets its match. Fireworks ignited one day early on Wall Street this year. The market kicked off the second half of the year on a positive note, with the Dow reaching [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-108555","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/108555","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=108555"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/108555\/revisions"}],"predecessor-version":[{"id":108566,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/108555\/revisions\/108566"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=108555"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=108555"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=108555"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}