Some Stocks Are Cheap for a Reason

It's raining bargains out there!

There are plenty of stocks trading at historical -- if not outright hysterical -- lows out there, and the inner opportunist in us all wants to cash in.

I won't dispute that. I think this is definitely the time to be a buyer than a seller. I've seen several of my fellow Fools suggest compelling stocks to buy, and I usually find myself nodding along in agreement. However, for every ground floor opportunity, there's a value trap. For every stock that will bounce back, there's a company that just doesn't have the skills to score the way it used to.

Barron's ran an intriguing screen over the weekend, with Andrew Bary listing 22 S&P 500 stocks that have lost ground over the past 10 years even though their earnings have more than doubled.

The math makes sense. If a stock price contracts while profitability per share expands, a stock's P/E multiple will shrink.

The missing variable, of course, is that many of the nearly two dozen S&P 500 companies on Bary's screen are just shells of the companies they were in summer 2001. Obviously, they are all earning more than they were at the time, but the future prospects just aren't as bright.

Let me go over a few of the names that I think are value traps.

Sources: Barron's, Bespoke Investment Group, Yahoo! Finance. Price change as of Aug. 23. Total 10-year return and P/E as of Sept. 6. *Calculated from Capital IQ because of apparent typo in Barron's source material.

A decade of decadence
These were some pretty amazing companies, for the most part, in summer 2001. They're just not as resilient 10 summers later.

Amgen was flying high on the strength of Neupogen and Epogen a decade ago. It was a rock star tweener straddling the biotech and Big Pharma realms. Where is it these days? Neupogen and Epogen are still around, but the limited shelf life of drug patents and an uninspiring pipeline are keeping performance and future expectations in check.

Analysts see Amgen earning $5.21 a share this year, exactly what it posted last year.

Best Buy was the place to go for buyers of the latest consumer electronics gadgetry. Things aren't going so hot these days. Even with the liquidation of chief rival Circuit City, Best Buy has clocked in with three consecutive quarters of negative comps and year-over-year declines in profitability.

Two things have been working against the superstore chain over the past decade: e-commerce and digital delivery of media. The success of e-tail and barcode scanning apps make it easy to realize that Best Buy is no longer the cheapest option on many items. Folks downloading digital versions of CDs, books, video games, and movies make it less necessary to trek out to the local Best Buy.

Cisco was thriving during cyberspace's halcyon days. Everybody needed Cisco's routers, switches, and other networking gear. The pop of the dot-com bubble temporarily tripped up Cisco, but the real shame these days is that the competition has become more cutthroat and that Cisco had to recently stage a partial retreat out of the consumer market.

Mr. Softy was a speedster a decade ago, but it's been a slowpoke lately. Revenue and operating profits climbed just 8% and 4%, respectively, in its latest quarter. It continues to lose face in the "good enough" computing realm as consumers flock to Android and iOS smartphones and tablets. If the trend continues, which way do you think its Windows and Microsoft Office cash cows will go in the coming years?

Perhaps the bigger victim of the "good enough" computing trend is Dell. PC shipments continue to decline in this country, and Dell's market share of that shrinking pie is also diminishing. Dell is trying to expand into crowded storage and business service areas, but it's a few pages behind everyone else's playbook.

H&R Block offices used to be buzzing, especially around the potent tax-filing season. These days find taxpayers turning to cheap software and even cheaper online filing to get squared away with Uncle Sam.

Gap was a mall hotbed of denim and khaki in the 1990s, but then cheap chic discounters jumped all over the basics bandwagon. Gap's three flagship concepts -- Old Navy, Banana Republic, and Gap itself -- have had more ups and downs over the years than a carousel ride.

Add it up
Are all seven of these companies earning more now than they were a decade ago? Absolutely. They wouldn't have made the cut if that wasn't the case. However, it wouldn't surprise me if some -- and perhaps even more than just some -- of these companies are earning less in 10 years than they are today.

Companies change. The S&P 500 is not a permanent growth fraternity. There are certainly bargains to be had in Bary's screen -- and pick up a copy of Barron's if you haven't -- but don't make the mistake of believing that the great companies of 2001 will be the great companies of 2021.

• Add Microsoft to My Watchlist.
• Add H&R Block to My Watchlist.
• Add Gap to My Watchlist.
• Add Dell to My Watchlist.
• Add Cisco Systems to My Watchlist.
• Add Best Buy to My Watchlist.
• Add Amgen to My Watchlist.