When value-seeking investors stock up on bargain stocks, things can turn out one of two ways. Best-case scenario, these inexpensive investments take flight, and produce gains for their buyers. But sometimes, cheaply-had holdings are just plain cheap and never manage to pick up the hoped-for momentum. Instead, they continue to depreciate, and their outlook just keeps getting gloomier.

In value investing, it's a risk that comes with the territory. These so-called "value traps" aren't stars in disguise -- as Merrill Lynch & Co. strategist Savita Subramanian puts it, they're "cheap for a reason."

According to Whitey Tilson of the Tilson Focus Fund, there are two kinds of value traps. There's the "dead money" type, where a company with solid financials and growth potential simply lacks the catalyst to move onward and upward. Or, worse yet, there's the value trap with a market share on the wane in an industry on the decline. 

Value traps are often tough to spot before it's already too late. But there are a couple of factors that can clue you in. According to John Linehan, manager of the T. Rowe Price Value Fund, a value find should have strong free cash flow, a solid balance sheet, and high-quality assets -- a lack in any of these areas should raise a red flag.

And ask yourself, is the company simply on the downswing of a natural cycle -- or is it stuck in a longer, more permanent rut?

Here's a list of eight possible value traps, with low price to earnings ratios and declining cash flow growth. In other words, even though these companies have low valuation ratios, they don't have much free cash flow to back up their operations. But don't take our word for it -- use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

Company

Price to Earnings Ratio

Cash Flow Growth Over the Last 5 Years

Cardiome Pharma (Nasdaq: CRME)

6.9

Declined by -36.96%, lower than the industry average growth of 8.45%

Internet Capital Group (Nasdaq: ICGE)

6.45

Declined by -33.64%, lower than the industry average growth of 8.71%

AEGON N.V. (NYSE: AEG)

6.97

Declined by -18.35%, lower than the industry average growth of 5.09%

Mizuho Financial Group (NYSE: MFG)

6.18

Declined by -18.01%, lower than the industry average growth of 6.38%

Tenet Healthcare (NYSE: THC)

3.6

Declined by -17.09%, lower than the industry average growth of 18.47%

Fidelity National Financial (NYSE: FNF)

8.53

Declined by -12.61%, lower than the industry average growth of 5.09%

Assured Guaranty (NYSE: AGO)

3.02

Declined by -11.87%, lower than the industry average growth of 5.09%

Wet Seal (Nasdaq: WTSLA)

4.58

Declined by -8.5%, lower than the industry average growth of 3.62%

Cash flow data sourced from Fidelity. The list has been sorted by the change in cash flow growth over the last five years.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.


Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.

Fidelity National Financial is a Motley Fool Inside Value recommendation. Yongye International is a Motley Fool Global Gains selection. The Fool owns shares of Fidelity National Financial, and Yongye International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.