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Beware!
The danger of investing in stocks with compelling valuations is that they’re often cheap for a reason.
So-called value traps lie everywhere, and in a note to clients on Tuesday, Bank of America strategists led by Savita Subramanian sought to identify them, at least those in the S&P 500 SPX, +0.04%.
REITs including Welltower WELL, -0.76%, telecoms including CenturyLink CTL, -0.13% and multi-utilities screen as traps, according to the report. Bank of America identified trap stocks as those with below-median valuations on forward price-to-earnings vs. the 10-year history, below-median revision trends and below-median price momentum.
Quality value, Bank of America said, lies in traditional cyclical industries like household durables, autos, metals and mining, construction materials and semiconductors.
It should be noted however that Subramanian is a fan of value right now as opposed to growth stocks. She points out that on 16 out of 20 measures, stocks are expensive. In March 2009, stocks appeared inexpensive on all measures expect for trailing price-to-earnings.