Value Trap: 2 Stocks to Not Buy at the Dip

They say buy the dip, but not every dip is a buy. Some stocks are value trap. Free your portfolio from such stocks. 

| More on:

There is a famous quote by Ben Graham that Warren Buffett reiterates: “Price is what you pay. Value is what you get.” Buffett loves buying value stocks at a dip. But not all stocks that have dipped significantly are value stocks. 

A value trap 

A value stock has strong fundamentals to grow profit or sustain its current cash flows. The reason why that stock is cheap is that a short-term crisis has created a sell-out. 

But the problem with such sales is you have to be vigilant to avoid buying a bad product. Some stocks have dipped, because they don’t have a promising future — just bouts of lottery ticket wins. 

Facedrive stock

Facedrive (TSXV:FD) stock soared 712% between October 2020 and February 2021 on the back of the electric vehicle (EV) wave. That was when the Joe Biden presidential win created a fervour in everything environment friendly. Facedrive, which markets itself as the “people-and-planet first” tech ecosystem, attracted investors’ attention for its go-green tree-planting initiatives. But in the end, business is business. Marketing can only give you a hologram of success. But it’s the numbers that keep investors engaged. 

And Facedrive couldn’t produce numbers. It started as a ride-sharing business, and when you look at its financial figures, you will see a failure brewing. Facedrive’s revenue from its core business of ride sharing fell 72.5% year over year in the first quarter.  Yet the press release headlines read, “Facedrive Reports Record Revenues in Q1 2021.” I don’t know how to make sense of it.

The company’s overall revenue surged 34% to $4.25 million, of which $4.09 million (96% of its revenue) came from the two acquisitions — Foodora and Steer — it made last year. I could even discount the ballooning losses, considering the business is in a nascent stage. But I can’t let go of the fact that the so-called ride-sharing company is now a food-delivery company. 

A company that is not sure of its business is nothing but a value trap. Facedrive stock has dropped over 75% from its February high. If you think $14.52 per share is a cheap price, I’d bet two cheeseburgers that it will give you better value than Facedrive ever will. 

Shaw Communications stock

Shaw Communications (TSX:SJR.B)(NYSE:SJR) is not a stock you would want to buy at the dip. The stock surged 44% in mid-March after Rogers Communications revealed its plans to acquire Shaw. Shaw’s stock price surged only 25% in nine years from January 2011 and 2020. The only reason why investors stayed was for its dividends, which have not grown consistently. So, you can’t quite call it a Dividend Aristocrat. 

Shaw operates in the telecom market that is dominated by BCETelus, and Rogers; together, they control more than 90% of the market. The acquisition by Rogers is the best value Shaw’s shareholders can get. But investors have already priced in the acquisition, thereby limiting its upside. Now, any possible move in the stock will likely be a dip, depending on how the deal and the several regulatory approvals progress. 

Long story short…

If you are looking for cheap stocks, be vigilant and seek only those stocks that can grow revenue. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends ROGERS COMMUNICATIONS INC. CL B NV and TELUS CORPORATION.

More on Investing

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

Hourglass and stock price chart
Stock Market

It’s Not Too Late: Invest in These TSX Growth Stocks Now

Solid fundamentals of these top TSX growth stocks could help them maintain strong upward momentum in the years to come.

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

stocks climbing green bull market
Stocks for Beginners

3 TSX Stocks Soaring Higher With No Signs of Slowing

Don't ignore stocks just because they look like they're at a high price. Instead, see exactly why they've driven so…

Read more »

dividends can compound over time
Bank Stocks

Is TD Bank Stock a Buy for Its 5.2% Dividend Yield?

TD Bank stock offers a rare 5.2% dividend yield—can it rebound from challenges and reward contrarian investors? Here's what to…

Read more »

chart reflected in eyeglass lenses
Investing

How Should a Beginner Invest in Stocks? Start With This Index Fund

This Vanguard index fund is the perfect way to start a Canadian investment portfolio.

Read more »

analyze data
Bank Stocks

Is BMO Stock a Buy for its 4.7% Dividend Yield?

Bank of Montreal is up 20% since late August. Are more gains on the way?

Read more »