Five signs your stock could be a 'value trap'

Common features

Cheap companies can look appealing but use these signs so that you do not fall into a value trap, writes Andrew Lyddon, fund manager, equity value at Schroder Investment Management.

'Value traps' are investments that appear undervalued but turn out to be cheap for a reason - often because a company's ability to make profits has been severely, and permanently, impaired in some way. Ensuring we do not invest in value traps is a key part of what we do and so it is instructive to highlight a presentation on the subject by the immensely successful investor Jim Chanos, who made his reputation shorting the shares of overvalued businesses. Chelverton to launch European fund According to Chanos, he often finds himself shorting companies that appear cheap and often does...