- Value Stocks Have Underperformed for Years; the Dream of Mean Reversion

- Value Traps Camouflaged to Look Just Like Value Stocks but Get Cheaper and Cheaper

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- History Littered with Failed Turnarounds; Seven Simple Rules to Distinguish the Two

The holiday season kicks off this week as consumers get ready to stampede for Black Friday shopping deals. Everyone wants bargains. Investors, too. Who doesn’t like a cheap stock?

Diligent value discrimination is imperative this year, with the Standard & Poor’s 500 index up some 25% so far. The natural inclination is to go bargain hunting for cheap stocks, shares that have underperformed the rally. Some investors will find the siren’s song of “cheap” stocks irresistible, only to crash upon the “value trap” rocks.

Second, value stocks have been outperformed by growth stocks for half a decade. (See nearby chart.) Since 2009, for example, the Russell 1000 Growth index (RLG) is up almost 80%, trouncing both the Russell 1000 Value index, up 28%, and the Standard& Poor’s index (SPX), up 53%. The dream of mean reversion says that after so many years, value stocks have to go up, right?  Some value stocks do, but some are value traps and just get cheaper and cheaper.

Let’s define both. A valu...

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