value trap

Definition

A stock that appears cheap based on traditional metrics but deserves the low valuation because the business is deteriorating. Looks like a bargain, performs like a money incinerator.

Example Usage

The retail stock trading at 5x earnings seemed like a value trap when we realized e-commerce was destroying their business model faster than they could adapt.

Origin

Investment terminology warning that low valuations can be justified rather than opportunistic.

Fun Fact

Value traps explain why legendary value investors sometimes blow up—what looks like 'cigar butt investing' turns out to be catching falling knives.

Source: Equity investment analysis

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