Falling into value traps is one of the biggest mistakes value
investors make. Value traps tend to appear cheap, but their
business internals are deteriorating - the business is destroying
value. We are having
a very good discussion about how to avoid value
here. We pointed out that one of the obvious sign of a value trap
is declining profit margins, as seen clearly from companies like
), Nokia (
) and RadioShack (
We will release a feature of "Warning Signs" which will warn you
if a company has declining profit margins. Using our "
" we did a simple screen for companies that are having declining
profit margins in the technology and consumer service sector. The
market cap of the companies is at least $1 billion. These
companies have seen declining profit margins over the past five
Share Price ($)
Market Cap (mil)
||CVS Caremark Corporation
||Cardinal Health, Inc.
||Omnicom Group Inc.
||Marriott International, Inc.
||Starwood Hotels & Resorts Worldwide, Inc
||Southwest Airlines Co.
||Computer Sciences Corporation
||The Wendy's Company
||Vail Resorts, Inc.
||The Cheesecake Factory Incorporated
||Avis Budget Group Inc.
||General Cable Corporation
||Texas Roadhouse Inc
||Jack in the Box Inc.
Some of the margin declines are caused by the structural change
of the business. The company may go through acquisition or
spin-offs. Some of them do have long-term decline. A few examples
Cardinal Health Inc.
Carnival Corporation (
Hewlett-Packard Company (
Jim Chanos has been shorting HPQ
, saying it is a value trap. It does have the sign of it:
long-term margin decline:
Will new HP CEO Meg Whitman turn it around? We don't know, and
that is again a "too-hard" question to answer. There are plenty
of companies that are of higher quality and have sustainable
profit margins. Why would we want to bet on it?
"I would rather
buy good companies at fair prices
than buy fair companies at good prices." Haven't we heard this
many times?About GuruFocus: GuruFocus.com tracks the stocks picks
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