The Daily Telegraph - Saturday - Money
Eight ‘bargain’ stocks to avoid
Some shares are cheap for very good reasons. Sam Benstead uncovers the stock market’s ‘value traps’
For most investors, cheap shares are good shares. If the share price of an excellent company drops unjustifiably, it can be a great opportunity to buy. In time, other investors will cotton on and bid shares up to their fair value.
Applied correctly, this strategy is a recipe for investment riches. Just ask Warren Buffett, who became the world’s most famous investor by employing this “value” approach.
Where many investors go wrong is that they buy shares which are cheap for very good reasons and could even be heading for collapse. These are known as “value traps” and should be avoided at all costs. But identifying them is not always simple. Telegraph Money has found eight to steer clear of.
TRAVEL Airlines have become large businesses while struggling to make much money, according to Nick Kirrage, a fund manager at Schroders who oversees £ 12.5bn in value investment strategies.
“It’s an industry whose economics are genuinely broken. The problems are most acute for national flagship airlines which are saddled with unionised labour forces and higher wage bills, and have struggled to compete with low-cost rivals,” said Mr Kirrage.
In Britain, this means International Consolidated Airlines Group, the owner of British Airways, which also owns Iberia, the Spanish airline.
Its shares are 62pc lower than at the start of the year and at one point were about 80pc down. The pandemic hit it particularly hard because it relies heavily on business travellers, many of whom have switched to video conferencing, whereas low- cost airlines cater more to holiday traffic, according to Joe Healey of The Share Centre, a stockbroker.
This also has knock- on effects for upmarket hotels that rely on business travel. InterContinental Hotels Group is one example. “With Zoom replacing business meetings this year, hotels will suffer. IHG could be a casualty of this trend,” said Mr Healey.
‘The economics of the airline industry are genuinely broken’
CINEMAS Another industry that is going only one way, according to Mr Kirrage, is cinemas. “Cineworld, Britain’s largest cinema group, is heavily dependent on blockbuster releases,” he said. “But now they are in doubt following Warner Brothers’ decision to stream its new releases online as well as put them out in cinemas.”
John Moore of Brewin Dolphin, the wealth manager, said part of Cineworld’s problem was that it had a lot of physical property, a lot of debt and a lot of regions to manage around the world.
“Even if you believe that we will go back to normal, its ability to dictate ticket prices has been compromised by streamed content from the likes of Disney and Netflix. It is currently lossmaking and should be considered a value trap even though its shares have lost about 70pc this year,” he said.
FASHION Fashion brands with physical stores are battling against online- only specialists such as Asos, Boohoo and Hut Group – and losing. None are more affected than Ted Baker, Superdry and Quiz.
Mr Kirrage said: “It’s hard for storebased retailers to compete with online upstarts and reinvent themselves. They have too many stores already, which is dragging them down.
“Clothes are easy to buy online, whereas bigger- ticket items such as sofas or electronics are better suited to physical stores, so the chains that sell them, such as DFS and Dixons Carphone, may well survive.”
Shares in Ted Baker have lost almost two thirds of their value this year. Superdry’s and Quiz’s have halved.
OIL The International Energy Agency expects oil demand to peak in 2040 but investors are looking past that and have already begun to ditch oil companies.
Shell and BP look cheap on price-toearnings ratios of around 10 but they are value traps, according to Mr Healey.
He said: “While oil demand could still rise, the cost of renewable energy is coming down and governments are pushing for electric vehicles. Even Shell and BP realise the writing is on the wall, so they are trying to move into renewable energy themselves.”