In this video, Motley Fool analyst Austin Smith talks about the dangers of falling into a value trap. In his case, it's buying shares of Supervalu (NYSE:SVU), with a hope for the company's turnaround. This can be the same for other companies, like Best Buy Co. (NYSE:BBY), hhgregg (NYSE:HGG), Barnes & Noble (NYSE:BKS), and, to some degree, J.C. Penney Company (NYSE:JCP) and Sears (NASDAQ:SHLD).
By seeing the cheap stock price, he overlooked the fact that the company had too much debt, and they were operating in a deteriorating environment because of competition (Walmart and Walgreen). Instead, he stacked up on "ifs" -- if they pay down their debt, and if they achieve these sorts of returns, etc., they could turn around in a big way.
When you start stacking up a chain of "if" theses, it's a warning flag for you, and not a great way for long-term investment.
Austin Smith owns shares of Supervalu. The Motley Fool owns shares of Best Buy and Supervalu. Motley Fool newsletter services recommend hhgregg and Supervalu. 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.