Sponsored Links


Evening with AK and friends 2017. Happening on 6 October 2017.

To retire by age 45, start with a plan.

"Is early retirement the right financial choice?" Jim Ellis discusses long-term financial growth strategies. I have blogged a...

Past blog posts now load week by week. The old style created a problem for some as the system would load 50 blog posts each time. Hope the new style is better. Search archives in box below.

Archives

"E-book" by AK

Second "e-book".

Pageviews since Dec'09

Recent Comments

ASSI's Guest bloggers

Is that stock a bargain or a value trap?

Thursday, October 17, 2013

Not long ago, I asked how can we tell the difference between a real bargain and a value trap in stock investing.


I recently came across a video by Pat Dorsey which I believe answers this question really nicely:





Thinking of any particular stock now?


Related posts:
1. 3 points in stock investing.
2. Tea with Solace: Valuation, PER and Value Trap.
3. Be cautious as we accept higher risks.

9 comments:

sillyinvestor said...

Hi Ak, your post set me thinking again?

How to know if a company is facing market headwinds or has competitive weaknesses?

I thought of a few points:
1) comparisons with peers and market leader. U wouldn't want your company to make poor earnings when competitors are booming.

2) Falling margins of greater magnitude compare to peers.

3) track records, was it a opportunistic spur in earning or was it consistent, resilient or able to recover to previous peak when market recovers?

4) is there a niche market or product, first mover advantage?

5) is the industry evergreen? Will the pie get bigger? Or will the trend be gone and never return. Tech companies are especially at risk.

AK, thanks for helping me crystalline my thoughts

AK71 said...

Hi Mike,

Oh, Pat did all the work. I just shared the video. ;p

You are always a deep thinker. Now, your comment has set me thinking. Thank you. ;)

Musicwhiz said...

Hi,

To add to what Mike has mentioned:-

1) You need to dig into the structural factors for a Company doing better or worse than peers. The market leader is not always the best investment as expectations for growth may have been more than priced in, hence a great company may turn out to be a poor investment. Value traps can also be defined as companies which have incorporated too much positivity and hence the potential for positive surprises is limited, hence even if all the goof stuff pans out you would not have any tangible share price impact.

2) Falling margins could be a sign of cost structure being poorer than peers, and an in depth analysis is necessary to find out why. The converse is also true.

3) Track records are well and good but are mostly anchored on historical data; what is most important is to assess the environment and industry characteristics to assess if the trends is likely to continue. Sometimes a change in senior management or CEO may precipitate a change for the better/worse which could not have been anticipated merely by looking at track records.

4) Niche may not always be a good thing because you have to know if the market size is large enough for the Company to be profitable. Niche may also mean pricing power is limited as you may risk chasing away your (loyal) group of customers. Growth is also not assured as you are offering a very specific tailored product/service and product line extensions or brand extensions may not sit well with the niche customer base. First-mover advantage is over-hyped - it only works if you can build critical mass in an industry where scale and distribution reach matter. Sometimes it may be better to let the first-mover make all the mistakes and then as the second-mover, you would know how to react and what customers REALLY want.

5) There are only a few industries which are truly "evergreen" and resilient to changes (e.g. food products, medical services); even then within each sub-segment there will be changes in preferences (for food - move towards healthier alternatives) or changes in technology (e.g. hospitals using more advanced MRI equipment). So as investors we have to continually assess not just the cyclicality of certain industries but also take note of the rise and ebb of preferences in various localities.

Just some thoughts.

Regards.

AK71 said...

Hi MW,

Thank you so much for the very high quality comment.

Very useful to anyone who might be doing some qualitative analysis. :)

sillyinvestor said...

Hi MW,

Thank you for your comments. I cannot stop thinking about porter 5 forces after u alert that analysis tool to me.

Questions. How do you do in dept analysis of cost structure besides numbers and footnotes of AR. Does it required a lot of legwork?

Also how does one keep track of rise and ebb of pereference of locality?

Internet is my only source if info. I have not tried visiting industrial sites and I am not sure what to look out for even if I am there. (E.g I am vested in reits and looking at some industrial companies)

AK71 said...

Hi Mike,

I kaypoh a bit.

Porter's framework is very useful but it is meant primarily for managers of businesses, I believe. Investors were not the target audience.

Managers who are insiders, of course, would have access to information which might not be readily available to retail investors like us.

I could fill in all the blanks when it comes to the industry I am working in. That kind of in depth knowledge is something potential investors will have a hard time accessing.

So, when I use Porter's framework as an investor, I fill in as many blanks as I could. We just cannot be as thorough as we would like to be. I can only hope to be approximately right. :)

Musicwhiz said...

Hi Mike,

Call companies, call their competitors, call their customers and talk to their suppliers or intermediaries. Get information from various sources and do inferences or reference checks. It IS a lot of legwork, no doubt about it!

Locality simply means country or region-specific. Each country has its own peculiarities.

Good luck.

sillyinvestor said...

MW,

Thanks. Sorry to ask silly qns again? Huh, call companies?? Pretend to be customers? I am not sure what info is not already on the Internet. I might have qns on their business direction or expansion plan, but I am not quite sure if they will talk to me, ESP about their competitors.

Mind to share how u go about doing such calls? How to break the ice?

Musicwhiz said...

Why would it be a problem to call a listed company? Most of them have IR personnel to help you with your queries. For those who do not, I usually speak to the CFO or the CEO directly. They are more than happy to talk.

I am not asking anyone to pretend to be anything. Be honest and truthful, always. Most companies are reticent when it comes to talking about themselves, but will have a lot of information on their competitors or the industry itself. Let them speak freely - I've listened to a lot of what they had to say; then you weigh it accordingly and check other sources to see if it ties in. A lot of thinking and work is required to ensure you get the right information.

Call the competitors of the companies you are interested in to find out more about their businesses, costs and other aspects. Treat it as a courtesy call to understand their business better.

Most executives don't mind telling you about their strategies for growth. Nothing specific of course, but you can get a general idea on their plans and how they perceived the industry, whether they are expanding capacity; and how they view competitive threats/substitutes etc. All very useful information which may come in handy at a later time.

No harm asking about their operational metrics and KPI as well, to know what motivates their staff and executives.

Just some of the aspects to ask about. There are probably many more you can think of.

Regards.

Monthly Popular Posts

 
 
Bloggy Award