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

< Go to Monday Morning Perspectives

This blog post is for informational use only. The views expressed are those of the author(s), and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications