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3 Tempting Stocks to Avoid

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Are these stocks value buys or value traps? Only time will tell, but we can offer some insight.

Sometimes it's difficult to distinguish between a value trap and a value buy. Some stocks can look awfully tempting depending on market conditions, and the challenge for investors is to figure out if it's worth taking the plunge. 

Here are three stocks that, though they might look enticing, are probably not worth buying.

Todd Campbell: Income investors might be drooling over PDL Biopharma's (PDLI) 6% dividend yield, but this is one stock that investors ought to avoid.

PDL Biopharma gets about 80% of its trailing revenue from royalties it collects on its Queen et al. monoclonal antibody patents. However, those patents have expired and the company reports in its annual filing that it doesn't expect to generate meaningful revenue from them after the first quarter.

Instead, PDL Biopharma's sales will rely on an entirely new business model of providing financing to emerging and cash-strapped healthcare companies. Collecting above market interest and potentially landing stakes in emerging healthcare companies could be an attractive new source of growth for PDL Biopharma, but it's simply too early to know for sure. Last year, interest revenue kicked in just $36 million toward PDL Biopharma's $590 million in sales.

Until we get more proof that PDL Biopharma's new approach can generate enough cash flow to support that tasty dividend, it's probably better to assume the dividend is going to have to be cut, and if that's going to happen, there's really no reason to take on the risk of stepping up and buying shares.

Dan Caplinger: Many value investors have taken a close look at American Express (AXP 0.46%) after the big drop it has suffered over the past year. The company took a big hit when retail giant Costco Wholesale decided to change the affiliation of its branded credit card away from American Express, and the pioneering card company is still struggling to find its way back toward stronger growth. The stock was one of the worst-performing members of the Dow Jones Industrials in 2015, falling more than 25%.

American Express still has plenty of things going well for it. The strong U.S. economy has kept cardholders spending, although the more difficult times in the luxury retail segment have posed some challenges for AmEx. Yet it foresees spending cuts in order to try to boost profitability even at a time when its natural revenue might end up shrinking substantially. Add to that the potential threat of an economic downturn that could hurt the creditworthiness of its card members, and American Express doesn't quite have the same appeal that it has had in the past -- and that its current low share price might suggest it should have today.

Evan Niu, CFA: I've never been a fan of Ambarella (AMBA 3.85%), despite the fact that the company has been a longtime official Motley Fool Rule Breakers recommendation. Shares have fallen significantly after peaking around $130 last year, which may tempt some investors to buy the stock. Full disclosure, Rule Breakers re-recommended Ambarella recently as well, which just makes the investing decision that much more complicated.

But we Fools embrace a diverse range of opinions, and I would avoid the video chip maker for a number of reasons. Anyone who follows Ambarella knows that it is intimately tied to GoPro (GPRO -1.77%) right now, for better or for worse. Recently, that's been for the worse as the action camera market decelerates. Much like GoPro, Ambarella also thinks it has a lot of opportunities in drones, but the drone market is similar to the action camera market in the sense that both are niche markets for enthusiasts with limited upside in terms of unit volumes. GoPro mistakenly believed that it had a path to the mainstream, an argument that led to misplaced valuations. The same may be true of drones.

At the same time, Qualcomm (QCOM 1.92%) is stepping into the ring, and that is not a chip company you want to compete with. Even as it has stumbled recently due to growth concerns, the mobile chip giant is still a massive force with a commensurately large R&D budget to contend with. Besides, Ambarella's markets are all tangential to Qualcomm's, so the incremental cost for QCOM to compete using its Snapdragons is relatively minimal, and Snapdragons are among the most sophisticated SoCs in the world.

It's hard to see any meaningful positive catalysts for Ambarella on the horizon.

Dan Caplinger has no position in any stocks mentioned. Evan Niu, CFA has no position in any stocks mentioned. Todd Campbell owns shares of AMBA. The Motley Fool owns shares of and recommends AMBA, COST, GPRO, and QCOM. The Motley Fool recommends American Express. 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.

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Stocks Mentioned

American Express Company Stock Quote
American Express Company
$164.65 (0.46%) $0.75
PDL BioPharma, Inc. Stock Quote
PDL BioPharma, Inc.
Ambarella, Inc. Stock Quote
Ambarella, Inc.
$91.05 (3.85%) $3.38
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$151.38 (1.92%) $2.85
GoPro, Inc. Stock Quote
GoPro, Inc.
$6.64 (-1.77%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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