How to avoid a value trap

EV charging may be in for an overhaul

EV adoption increased above 8% in the US in 2024 (1.3 million vehicles out of 15.9 million sold) and the growth of EV sales was 7% YOY vs. 2% for overall vehicle. However, some engineers point out that the current EV infrastructure is complex as well as expensive and perhaps unnecessarily so.

Professor James West of Johns Hopkins argues that a new network of EV chargers that avoids galvanic isolation — the prevention of direct current flow not a indie band some the early 2000s — should be deployed to support the growth of EV adoption, by making the infrastructure itself more cost effective to deploy and the charging process more efficient.

Avoiding the traps when searching for value

The idea of a value trap is when a company appears cheap relative to its historical fundamentals, but there are fundamental reasons why the future cashflow value will not come to fruition. There are a variety of reasons for this, including:

• Eroding earnings due to changes in the business model or consumer preferences

• Lack of growth potential (addressable market is saturated)

• Competition is becoming increasingly fierce

• Poor management

• Higher debt levels

But are there signs you can look for to avoid such traps? Yes, indeed! Morningstar Europe has a nice overview of how to avoid value traps that is worth checking out. Here are a few of the basics:

• Conduct thorough fundamental analysis beyond just looking at valuation ratios

• Assess the company's long-term prospects, competitive advantages, and management quality

• Consider industry trends and potential disruptions

• Look for signs of financial distress

The Evolved Investor should have a stock screener, sometimes referred to as a watchlist, to track 50-100 stocks that they may consider purchasing and, over time, as market prices fluctuate, look for the right entry and exit points, trying to avoid the traps.  

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CIVI

Speaking of value traps…

Previously, we had suggested our audience to look at Civitas Resources, citing its low valuation versus the potential value of its future cash flows. However, the Securities & Exchange Commission has initiated a securities fraud investigation into CIVI. Unfortunately, these unforeseen events are part of the investment risk landscape.

Some firms have downgraded their recommendations to hold, while Piper Sandler has a revised $66 price target on the stock and an overweight rating as of March 6.

The stock is down 30% year to date, and insiders are dumping shares which is not a good sign. If you have a position, we recommend closing out and working with Glancy, Prongay, and Murray on the class action to potentially recoup some losses.

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_{Legal Disclaimer: The Evolved Investor is for information purposes only and is, by law, not personal investment advice. Concepts and ideas are for your consideration only. We encourage our readers to do their due diligence. Investing has inherent risk, and investments can lose value.}