Investing in shares that have been beaten down by the market is a risky business. The returns could be huge but it’s highly likely that shares will continue to slip lower with momentum. These three stocks have all underperformed the wider equity market in 2016 and today I’m investigating whether these shares are value traps or bargain buys. 

Retail headache

Next  (LSE: NXT) has fallen over 26% since 1 January this year after an amazing run over the last few years. The company released a cautious trading statement and some analysts believe that the company can’t keep up this earnings growth. If you believe in the UK retail sector then this share is perfect for you, Next trades on a very attractive PE of 11.6. The company is very well run and operating margins have steadily increased, in 2016 ROCE (Return on Capital Employed) was a huge 75%.

These numbers highlight the cracking management team the company has and its ability to generate cash and profits for shareholders. For income investors there’s a nice 3% dividend yield too, which is covered 2.8 times by cash. 

Troubled sports firm

The biggest faller on the list is sports retailer Sports Direct International  (LSE: SPD).Its shares have fallen a whopping 35% this year. Just like Next, the company has performed incredibly well over the last five years growing revenues and profits. The company in January released a profit warning and gave a new range of expected EBITDA for the year to April 2016. Further bad news arrived last month when it warned that EDITDA would be at the bottom of the new range. 

Sports Direct trades on an attractive PE of just over 10, which offers some scope for an increase in the share price. In my opinion, the company is one to leave for the time being, but if it falls much lower it could become a good contrarian bet. 

Construction slowdown

Finally we have the US-focused equipment company Ashtead Group  (LSE: AHT). Its shares have slipped 25% this year on housing sector worries in that market. The general outlook for the US housing sector has weighed on shares and investors have been taking profits ahead of what may turn out to be an extremely challenging year for the company. The company looks pretty cheap at the moment, the PE ratio is 9.3 and it pays a nice 2% dividend which is covered over four times by cash. The last eight years have been incredible for the company and barring any macro-economic changes, that looks set to continue.

The problem here is that construction in the US is slowing. That leaves companies like Ashtead exposed to a slowdown due to high debt levels and a potential fall in revenue. However, the stock is well down from highs so some aspect of a slowdown may well be priced-into the stock already. It’s definitely one to watch in the next year. 

If you look for growth stocks that could provide huge returns well into the future then click here to read a report on one of London's top growth stocks.  

The growth stock report has been written by the Motley Fool and it provides investors with a growth stock that could have huge returns well into the future.

The report's free and there are no obligations. All you need to do is click here and you can be reading the report in seconds!

Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.