The Value Trap

February 21, 2017

The Value Trap Photo

In this short trading week, I will be watching to see if we get any more information on the Federal Reserve's (Fed) current thinking when they release the January meeting minutes this Wednesday. If U.S. economic data remains strong, I expect the Fed to increase interest rates by 25 basis points (bps) at the March meeting. Also of interest this week is the expected release of Berkshire Hathaway's earnings and Warren Buffett's annual letter on Saturday, which to me is a must read.

Buffett may be the greatest value investor of all time. The key to being a great value investor is avoiding the value trap. The value trap is when a stock looks attractive because it has been trading at a low multiple of earnings, cash flow or book value for a prolonged period of time. The trap is sprung when the price doesn't recover as expected.

I also believe the value trap exists for contrarians with market moves. When asset classes look cheap, sometimes they don't recover in a timely manner. Recently, I was discussing stock volatility which has continued to trend lower as the market has made new highs. Some may say volatility is cheap, but this could be a trap as volatility doesn't have to move higher and could move even lower and continue to confound market prognosticators.

Tune into CNBC’s Power Lunch on Monday, February 27 between 1:00 pm ET and 3:00 pm ET to hear PMAM Chief Investment Officer Mark Heppenstall’s thoughts on the current market environment. Be sure to check next Monday’s post for the exact timing.

Tags: Monday Morning O'Malley | Federal Reserve | Interest Rate | Volatility | Monetary policy | Earnings

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