Don't Get Caught Buying Sucker Stocks
How to avoid a classic value-investing mistake.
My biggest investing mistake was buying a sucker stock.
The name of the company was Pacific Dunlop (PDLPY), an Australian conglomerate that I bought in 1997 for what I thought was a song. I paid $10 a share, which was about 10 times earnings at the time. It’s now trading for a buck and change. What went wrong?You name it--restructuring charges, lawsuits, a weak Australian currency. It was a classic case of getting caught in the value trap: Buying a stock because it's cheap, only to find out it deserved to be even cheaper.
Sucker Stocks Abound
I ran a screen in our Premium Stock Selectorfor stocks that, like Pacific Dunlop, are deceptively cheap. These are stocks that look great based on standard valuation metrics like P/E and price/book, but have mediocre star ratings. In other words, based on a more in-depth valuation analysis, our analysts think these stocks deserve a pass.
Haywood Kelly, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.