A recent article in Forbes discusses strategies for finding investment opportunities in out-of-favor industries and avoiding value traps.
Here are some highlights from the article:
- Investors can avoid falling into value traps by ascertaining whether the industry has staying power and if the underlying products are still in demand. Once that is determined, investors should turn their focus to the individual players in a given sector with specific attention to competitive edge, earnings prospects, and the strength of consumer franchises.
- It’s important to weigh the risks associated with buying opportunities—the article uses the examples of the post-financial crisis housing industry, when valuations of housing-related stocks “fell to bargain basement levels. But because we couldn’t predict the timing of an eventual recovery, we took extra care when reviewing the balance sheets of the companies we considered buying.”
- The article offers insights regarding potential opportunity in the money management industry—which has seen a drop in share prices stemming from low volatility and the growth in passive investing. It reiterates the importance of evaluating ongoing demand for the underlying product, adding that while active managers have underperformed over the past decade, they are likely to outperform the S&P 500 again at some point in the future. “When that happens,” the article asserts, “demand will return, and outflows will likely turn to inflows.”
- The article concludes: “Many screens exist to help point you toward industries that have fallen out of favor. The key to finding value lies in determining why the industry has fallen out of favor, and whether those reasons create a temporary opportunity…or a permanent shift in fortunes.”