One of the biggest landmines investors need to avoid is investment in "value traps," particularly in the technology space. Just a few of these can ruin a portfolio's performance. It is not that easy to steer clear of such stocks. The temptation to buy these former high flyers at enticing valuations is akin to being tempted, in a game of Texas Hold 'em, to play King Jack or A10 unsuited. It is easy to throw in a few bucks and play the hand, and you might even win a few times along the way. However, the play is almost certain to be a bad trade over time, and it will likely leave you with big losses, especially if you continue to feed to pot in order to try to rescue your poor starting hand.
In the technology world, momentum seems to be everything, given the pace of change in the space. Companies like AOL (AOL) or Yahoo! (YHOO) can be riding high for years and then get crushed by one bad product cycle, a new competitor or a shift in consumer behavior. Once momentum is lost, it is extremely hard to recapture the magic. For every successful turnaround story like Apple (AAPL) or IBM (IBM) in the 1990s, there are a dozen others that turned out like Palm, Blockbuster, Wang Laboratories or Digital Equipment.
When a company does successfully reform, one of the key ingredients is usually a visionary leader. Unfortunately there are very few Steve Jobs in the world. Even someone like Dan Hesse of Sprint (S), who is doing a marvelous job so far in turning around that telecom name, is a rare find. So, all this being said, here are several "value traps" selling at rock-bottom valuations that should be avoided.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV