If it’s too good to be true, it usually is. That’s the mantra emanating from JPMorgan Asset Management when it comes to value trap stocks or those equities that are trading at such low levels that investors see a buying opportunity. The bottom fishing tends to be a bad bet with value trap stocks and is something JPMorgan is warning could happen more often in the current investment environment.
In a research note covered by Bloomberg, Mark Richards, a global strategist at JPMorgan Asset Management warned value traps are close to a 30-year high on a global basis. His red alert comes as value stocks appear poised to rally after some underperformance. (See more: Disney, Amgen Benefit From Shift to Value Stocks.)
Low Multiples Misleading
“The risk of picking a cheap stock that turns out to be a value trap has only been greater during the depths of the global financial crisis,” wrote the strategist, noting that disruptions from technology innovations and globalization has led to an increase in value traps even though they typically rise during recessionary periods. Richards pointed to the impact of e-commerce on physical retailers, the inability for companies to raise prices because of the ease of price comparison tools and rising competitive pressures as tech lowers the barriers to entry as an example of the disruptions. As a result, Richards said a low earnings or book value multiple doesn't mean the stock’s price represents a good deal.
Value Has Been Doing Better Than Growth
That may be hard for value investors to swallow given value has been doing better than growth stocks since the start of August, reported Bloomberg. With investors expecting more out of corporate earnings during the second quarter, coupled with some misses on the part of technology heavy hitters, investors have been moving to value stocks which has helped the group. But those concerns may be overblown too.
While some are worried about the lofty valuations for the leading tech stocks bulls argue valuations alone don’t provide an accurate picture of the tech companies’ prospects. They prefer to look at financial and strategic progress which, they point out, are more important metrics for creating long-term shareholder value. (See more: Why Bulls Say Worries About FAANG Stocks Valuations Are Overdone.)
Even if value stocks are doing better than growth, Richards isn’t impressed. He’s focused on quality and growth with a bent toward U.S. stocks over international ones, noted Bloomberg.