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7 Stocks That Could Be Value Traps

Wayne Duggan

Look beyond the metrics to get a true picture of these stocks.

Value investors are always on the lookout for stocks that are priced below their underlying value based on fundamental business metrics such as price-earnings ratio, price-sales ratio or tangible book value per share. However, sometimes a stock may seem like a great value at first glance, but a closer look at the company reveals some red flags. Companies with high debt loads, eroding market share, businesses in secular decline or other problems are often considered to be "value traps." Here are seven stocks that could be value traps, based on commentary from the CFRA analyst team.

AK Steel (ticker: AKS)

AK Steel has an earnings multiple of just 4.3, but analyst Matthew Miller says challenging fundamentals will likely persist into 2020 for steel stocks. AK Steel's decision to idle its Ashland Works facility is saving $40 million in costs. But steel prices have been falling since late 2018 while iron ore prices have ticked higher this year. Miller is projecting AK earnings declines in 2019 and 2020 and says the company's $808 million in unfunded pension and other liabilities will also weigh on its valuation. CFRA has a "strong sell" rating and $2 price target for AKS stock.

Nordstrom (JWN)

It's no secret that brick-and-mortar mall retailers have been under pressure in the e-commerce era, and analyst Camilla Yanushevsky says Nordstrom is no exception. Nordstrom cut its full-year earnings and sales guidance in August to reflect the latest round of trade war tariffs. Yanushevsky says women's apparel and full-price merchandise sales have been persistently weak, and the upcoming opening of the company's women's flagship location in New York is a gamble. Shares trade at just 10.9 times trailing earnings, but CFRA has a "sell" rating and $25 price target for JWN stock.

Capital One Financial Corp. (COF)

Analyst Chris Kuiper says Capital One simply has limited growth opportunities given recent interest rate cuts and a deteriorating auto market. At the same time, he says investors aren't fully appreciating Capital One's credit risk. While delinquencies and charge-offs have remained moderate, Kuiper says Capital One has the highest exposure to both subprime credit card debt and subprime auto debt among its peer group. Capital One may look cheap at first glance trading at an earnings multiple of just 7.9. But CFRA has a "sell" rating and $75 price target for COF stock.

Dillard's (DDS)

Yanushevsky says Dillard's is also dealing with the one-two punch of online sales competition and trade war tariffs. Yanushevsky says Dillard's has fallen behind its mall retail peer group in partnerships and innovation. Dillard's conservative approach to the changing landscape has been reflected in its declining traffic. Yanushevsky is projecting -4.5% revenue growth in fiscal 2020 and another 2.1% drop in fiscal 2021. CFRA projects a 2% annual same-store sales decline through fiscal 2021. Despite Dillard's modest 12.8 earnings multiple, CFRA has a "sell" rating and $38 price target for DDS stock.

Dish Network (DISH)

Dish shares may look like a value priced at just 12.5 times earnings, but analyst Tuna Amobi says DISH's plan to stay relevant in the cord-cutting era is extremely risky. DISH plans to become the fourth "major" U.S. wireless provider following the Sprint Corp. (S) and T-Mobile (TMUS) merger. DISH agreed to purchase $5 billion in wireless assets from Sprint and T-Mobile and plans to invest $10 billion in building its own network. Amobi is skeptical of the long-term financial viability of that strategy. CFRA has a "sell" rating and $35 price target for DISH stock.

Gap (GPS)

Gap has recently relied on top-performing brand Old Navy to prop up overall results, but even Old Navy disappointed investors last quarter. Gap plans to spin off Old Navy to potentially unlock shareholder value, but Yanushevsky says Gap's entire brand portfolio is having the same problem. Old Navy same-store sales were down 5% last quarter, Gap sales were down 7% and Banana Republic sales were down 3%. Yanushevsky says Gap's 5.7% dividend may soon be on the chopping block. CFRA has a "sell" rating and $15 price target for GPS stock.

Harley-Davidson (HOG)

Harley-Davidson has butted heads with President Donald Trump on multiple occasions as it struggles to deal with trade war tariffs in China and Europe. To make matters worse, Harley is having an increasingly difficult time appealing to younger customers. Analyst Garrett Nelson projects a mid-single-digit decline in revenue in 2019 driven by reduced motorcycle shipments. In addition, CFRA is projecting a 2% drop in the company's razor-thin operating margins as manufacturing costs rise and financial services income drops. Despite a 13.1 earnings multiple, CFRA has a "sell" rating and $30 price target for HOG stock.

Avoid these value trap stocks:

-- AK Steel (AKS)

-- Nordstrom (JWN)

-- Capital One Financial Corp. (COF)

-- Dillard's (DDS)

-- Dish Network (DISH)

-- Gap (GPS)

-- Harley-Davidson (HOG)

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