Value trap

A value trap is a share that looks cheap on the metrics used by value investors, but which deserves its low rating.

The typical value trap has a low share price by historical standards, so investors buy it expecting a recovery — it looks like a bargain price because it has come down so much. It is easy to negelect to properly examine the question of why the price has fallen.

A value trap may also be any share that looks cheap against measures such as PE. For example, a share may have a low historical PE because the market expects a decline in profits (of course, you might still regard it as a value share if you think the market is wrong....). A low rating may also be explained by high risk or corporate governance issues (e.g. if minority shareholders look likely to get a bad deal).

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