How is that a value trap? And it was also growing fundamentally
These are very subjective statements and completely depend upon the investment thesis and duration.
I entered REC when the price was 100 and exited sometime back. So I think I can freely comment here.
Why I exited REC and haven’t came back yet
Every investment comes with the cost of going wrong. In certain PSUs, this cost is a very good reason to look somewhere else. And, it’s not like investors cannot make money somewhere else – even in the same sector.
Example: Power Mech Projects, has gone 4-6 times in the last 2-3 years. I entered and exited in between.
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What is a value trap: Stocks are value stocks UNTIL they become a trap. By looking at the present, it’s going to be a never-ending debate whether xyz is the real value or a trap.
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Probability of making money in PSUs: Past tells us is that whenever a government owns or controls a sector too much, the industry/business is often inconsistent, and thus, predicting the business outlook (topline, margin, capex, policies etc) is very difficult. This often reflects in the low valuation multiple in such businesses. Whether it was gov owned IRCTC or a sector such as gaming (say Delta Corp), what seemed value/growth overnight became a pain. In a certain period, one might make money but that doesn’t change the probability of making money. One might feel even less comfortable when risks are weighed.
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The risks: The history says that one can make wealth here if good with timing. Once it becomes a trap, the difficulty is in the exit. Not only it kills the earnings and the time for the holding period BUT also the initial capital at times. To be fair, all stocks show cyclicality and at times may show value. However, the difference is some stocks even put your initial capital at risk, and only then it becomes a complete “trap”.
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Weighing the risk and reward: If I could make the good returns with one reduced risk (cost of going wrong), why would I invest in REC/PFC.
Can this be done? I believe yes and that is why I quoted one example earlier.
Disclaimer: Certain stocks may be in my portfolio and I may change my views anytime. Anything I say is NOT a BUY/SELL recommendation. Please do your own research and do not go by my words. I am not responsible for anyone’s gains or loss
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