Don't Touch These 3 Huge Value Traps

• Report this Comment On August 21, 2009, at 3:17 PM, StupidBush wrote:

  JDSU and CIEN these are tech stocks. Before and after the market crash, are they making profit? Plus, expectation for higher profits of tech stocks is total different from the Casino stock. WYNN and LVS are tangible businesses. Eco downturn or not, summer or winter, or something else, people are still spending in entertaining, gambling, traveling and so on. After, the recovery, WYNN and LVS are not making profits like JDSU and CIEN. If it is true, Investors, YOU are better not touching these stocks like the Author said because 5 year from now WYNN and LVS will be traded like current value or lower. If you have these, you are better investing your money somewhere else.

• Report this Comment On August 21, 2009, at 5:29 PM, BadBear89 wrote:

  CIEN... the mighty Ciena corporation... this company is one of the most hated companies by investors and analysts alike... BUT - why didn't they raise their estimates, like ADCT did on Aug 12 for Q3 earnings? BECAUSE THEY DON'T NEED TO! Unlike ADCT, CIEN has much more cash than debt - they have 1.03B in cash according to Yahoo Finance... That is only 0.04B less than their market cap... YES, CIEN COULD BASICALLY BUY BACK ALL OF IT'S OUTSTANDING SHARES IN CASH RIGHT NOW IF IT WANTED TO. Also, CIEN has generarted more contracts than ADCT since Q2 Earnings - So, while ADCT NEEDED to raise its estimates because it's stock was tanking, CIEN chose not to. You see, ADCT has more debt than cash. They raised their estimates, CIEN did not - DON'T LET THAT FOOL YOU! CIEN IS THE CHEAPER COMPANY - They will shatter their estimates... WHICH ARE MORE NEGATIVE THAN LAST QUARTERS - BECAUSE THAT IS HOW MUCH THE IDIOTS ON WALL STREET HATE CIEN! Disclosure - Long CIEN

• Report this Comment On August 21, 2009, at 6:07 PM, spokanimal wrote:

  This is interesting, but absolutely WORTHLESS as any kind of proxy of how to know the difference between a value trap and a turn-around candidate. Every company has a different situation and every beaten down company has a reason it has fallen on hard times.

  Usually, the difference between them relates most to the prospects of a company. In the early 80's, oil drilling contractors faced years oversupply and bleak prospects. Even at 3 times earnings in 1982, things looked bad.

  In your example, you cited Las Vegas Sands as a value trap. Wow! To look at your poor generalization in a more granular way, consider Sands relative to Sprint Nextel. Both companies bottomed out at around $1.35 last winter, but one clearly had a poor operating model in a highly competitive environment and the other had prized assets in lucrative, captive venues. My cellular phone service was Qwest... essentially re-branded Sprint until recently. It was less expensive because the service was bleak and, as the stonger carriers built out, Sprint had trouble keeping up on a challenged revenue base. Qwest dumped Sprint... no surprise... again, a company troubled by the recession but facing a much bigger, long-term competitive dis-advantage that would be difficult to overcome. Clearly, $1.35 was a value trap and it's still under $4 today.

  Las Vegas Sands, on the other hand, had serious debt problems and revenues were drying up with the recession. The debt was being used to build resorts that were half done as the recession hit. Fear of insolvency was what pushed the stock to $1.35.

  The liklihood of insolvency diminished this spring, however, and as the cloud lifted, it was clear that Sand's world-class assets in Macau and Singapore were positioned to dominate the industry as the recession subsided and the Cotai Strip was built out to realize critical mass in the world's fastest growing gaming region. The stock is now pushing $14, Macau is emerging with positive Year-over-year gaming revenues against a strong August of 2008, and Singapore's Marina Bay Sands is poised to open as what many will consider to be the most expensive, and the most profitable, gaming resort on planet earth.

  So yes, this article was ANYTHING but a guide to determining what is a value trap and what isn't. That's why those who truly and deeply understand a company and it's industry is in a much better position to recognize a value trap and a novice reading an article like this one is more likely to fall into one.

  Spokanimal

• Report this Comment On August 21, 2009, at 6:27 PM, StupidBush wrote:

  If the author has taken Accounting, he should know that Liabilities can increase profits. Even smart investors know to use Margin to increase profit. Yes, it is risky but if you know what is the return then you will probably take the chances. I know LVS has lots of debts but its casinos are all new which means LVS has years to generates $$$. I mean $$$ money. If the LVS CEO runs the company well, $$$ is equal to profits; Years of profits. For WYNN, i don't see why this company cannot push its stock price higher. Debt? Bad Management? what is it? One thing: The Economy. If any of you have never been to WYNN and LVS casinos, you should take a visit. It is a once of life time experience. Especially, WYNN (or the Encore) in Vegas.

• Report this Comment On August 22, 2009, at 4:40 AM, piggybank819 wrote:

  Huh, value trap for LVS and WYNN? Huh? They were value traps to the author when they were at their lowest in March. They were value traps to the author when they moved higher in April and May by 200% plus to 50% plus. They were value traps to the author just this past trading week, when LVS was over 900% higher than its March lowest, and same is being said for WYNN. So, they will forever be value traps no matter what. Yes, gaming will never return to its healthy state. Yes, people will not take vacations in Vegas and Macau. Yes, these companies have too much debt and ALL debts are bad and leverage only exists in our dreams. Yes, subscribe to FOOL. Yes, subscribe it NOW, if you are truely a FOOL.

• Report this Comment On August 22, 2009, at 4:46 AM, piggybank819 wrote:

  By the way, if these stocks were down so much for a reason, if that very reason is either being resolved or has been resolved, isn't there is another reason WHY these stocks are being chased after and are moving higher and higher now?

• Report this Comment On August 22, 2009, at 7:25 PM, henryking54 wrote:

  In his book "Investors & Markets," William Sharpe has a warning for you: the expected out performance of value & small-cap stocks may be a pipe dream. Sharpe challenges Fama and French on a number of fronts. First, he suggests that the high costs of establishing and maintaining a Fama and French strategy likely mitigate any benefit:

  It is possible that the costs associated with implementing the investment strategies required to obtain the returns on the Fama/French factors (”Small Minus Big” & “High Minus Low” book-to-price ratios) could easily be greater than any associated advantages. (page 198)

  Second, he suggests that small cap companies, like short put positions, might just outperform in the short term because they are more likely to mess up in a future market calamity:

  It could be that returns from value stocks and small stocks would be particularly poor in very poor markets. Perhaps small and downtrodden companies are more likely to fail in a serious depression than are large and profitable companies. (page 199)

  The empirical record may indicate that markets are more complex than posited by the simple CAPM. But it seems highly unlikely that expected returns are unrelated to the risks of doing badly in bad times. (page 200)

  Again, this argument will sound very familiar to those in the hedge fund industry since it is a key weapon in the hedge fund skeptic’s arsenal. Hedge funds, the argument goes, are essentially “short vol” (i.e. they “sell volatility”). They do this by (in effect) writing options and earning a steady premium from them. dollarAs long as volatility remains low, hedge fund managers look like heroes, generating miraculously steady returns that by definition are uncorrelated with market returns. This works, say the skeptics, until a “100 year flood” when the hedge funds have to pay the piper.

  Third, Sharpe says that even if small cap stocks once had a higher risk-adjusted return than large cap stocks, this phenomenon has disappeared. And the same thing is destined to happen to value stocks, according to Sharpe.

  …the superiority of small stock returns diminished substantially after 1980 following widespread attention to the phenomenon. More recently, the superiority of value stocks has been broadly publicized. If this truly reflected a market inefficiency, some future diminution might be anticipated. Methods for beating the market carry the seeds of their own destruction. (page 200)

• Report this Comment On August 22, 2009, at 7:36 PM, henryking54 wrote:

  Dear Mr. Bogle:

  In your most recent book, you advocate the use of a broad-based index fund (with a greater preference for an all US equities approach) for the equity portion of ones portfolio. You emphasize that trying to guess which segment of the market will “win” in the future cannot be determined any better than the futile attempts by market gurus to time the market or select the best individual stocks (at least after taking into account the cost of financial intermediation). You also say that there is a tendency towards “reversion to the mean” of any segment of the market that is momentarily doing better (or worse) than the overall market.

  Another book by a different author (Larry Swedroe’s “The Only Guide To A Winning Investment Strategy You’ll Ever Need”) also emphasizes the inherent sensibility of using a passive approach to investing. However, the author feels that certain segments of the market, such as small stocks, offer greater opportunity for larger returns due to the greater risk associated with these segments, which gets reflected in the pricing of such assets. The author recommends overcoming much of the greater risk of those market segments (or “asset classes”) by broadly diversifying within those segments using passively managed funds.

  What is your view on placing greater (but certainly not exclusive) emphasis on some of the these riskier market segments by using passively managed index funds as a way of improving the returns on ones portfolio without a commensurate increase in risk?

  I thoroughly enjoyed your Little Book on Common Sense Investing and am currently thinking through how to put its principles to work. The variation on your theme suggested in this other book was intriguing and I wondered how you view such “tweaks” on the general notion of passive investing that you’ve championed for so long. Your insights would be much appreciated.

  Best wishes,

  Jerry K

  ======================================

  Jerry,

  Good question!

  Fact is, I’m not one for trying to guess which styles will outperform or underperform–or when–and the data clearly show such changes are anything but sustainable or predictable.

  We’ll send you the data tomorrow on small-cap value stocks vs. the S&P 500. You’ll see that SCV underperformed from 1926 to1942 (14 years), did nothing from 1944 to 1963 (another 19 years) and again from 1968 to 1976 (eight years) and yet again from 1979 to 1999 (another 20 years). That’s a mere 61 years of the 79-year period where SCV was not a winning strategy.

  Admittedly, the explosion in SCV relative returns from 1999 through 2004 was impressive to a fault. So I’d definitely advise you to follow the strategy . . . but only if you can buy the style at 1999 prices.

  My guess–alas, it is little more than that–is that today will prove to be a bad time to commit your assets to yesterday’s winning strategy. So if the temptation to do so is overwhelming, just do a little teeny bit.

  Good luck!

  Jack Bogle

  http://johncbogle.com/wordpress/2007/06/01/176/

• Report this Comment On August 22, 2009, at 8:26 PM, henryking54 wrote:

  Question: The other dimension, of course, is size. Now the size effect is very easy for those of us in the investment community to accept. The notion that small companies are riskier than large companies seems obvious.

  Fama: That's not the reason the community accepts it. What they think is that small companies pay higher returns because they're unknown, or something like that. It's not because they're more risky. The risk, in my terms, can't be explained by the market. It means that, because they move together, there is something about these small stocks that creates an undiversifiable risk. That undiversifiable risk is why you get paid for holding them.

  Question: What causes that risk?

  Fama: You know, that's an embarrassing question because I don't know.

  Question: Fascinating. I would assume that the risk is that small companies have a lower survival rate than large companies.

  Fama: No. That's not it at all. The good news and the bad news about that is that the reason small companies don't survive is because some of them fail, others get merged; that's bad news and good news. Here's a fact I always use. First I say I don't know, but then I say it's fair. Here's my example. The 1980s were, supposedly, the longest period of continuous growth the country's seen since the second world war. Yet, in that decade, small stocks were in a depression. Small stock earnings never recovered from the '80-'81 recession. They were low the whole decade. The market was fooled every year by that, because in every previous recession, the small companies came back. Why did that happen in the '80s? I don't know. But it happened. And it tells you there is something about small stocks that makes them more risky.

  http://www.dfaus.com/library/reprints/interview_fama_tanous/

• Report this Comment On August 25, 2009, at 1:25 AM, greenwave3 wrote:

  LVS has way too much debt and the mere promise of glorious returns on casinos that haven't opened yet is a little presumptious. Cash flow stinks, and even if it improves dramatically, LVS is still overleveraged.

• Report this Comment On August 26, 2009, at 2:13 PM, StupidBush wrote:

  greenwave3, I think you may be lucky because you probably don't own LVS and I wish you and the author don't fall on this value trap because Casinos in Las Vegas, Macau and many other places are going out of businesses. Since, many people are not going to casinos any more, nobody is spending money and the Economy in US and other parts of the world are getting worser than before. I have question. I fall into this value trap at $3(LVS), am I in big trouble? Do you think LVS will fill Bankruptcy protection soon? Instead of Long LVS, should I　ｓｅｌｌ　ｓｈｏｒｔ　ｔｏ　ｃｏｖｅｒ　ｔｈｉｓ　ｖａｌｕｅ　ｔｒａｐ？　　Ｙｏｕｒ　ａｎｓｗｅｒｓ　ａｒｅ　ｖｅｒｙ　ｉｍｐｏｒｔａｎｔ　ｔｏ　ａｌｌ　ｏｆ　ｕｓ．　Ｔｈａｎｋ　ｙｏｕ．

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