Cheap shares: Beware of these 2 value traps in 2021!

The UK has suffered its worst pandemic in 100 years and steepest economic contraction in 300 years, yet the FTSE 100 index has held up pretty well in 2020. The Footsie has lost almost 980 points in 2020, but that’s only 12.9% (just over an eighth). Frankly, I’m surprised it isn’t more, given the crises we’ve faced. Then again, falling share prices are good news for hunters seeking cheap shares. But some fallen angels could well be value traps for unwary investors. Here are two stocks I’ll be avoiding in 2020–21.

The FTSE 100’s risers and fallers

For the record, of the 100 shares in the FTSE 100 for a year or more, 45 have climbed in 2020, and 55 declined. Remarkably, the average change across all 100 shares is positive: +2.3% over a year. Yet the index itself has dipped by 9% over 12 months. That’s because many top gainers are smaller companies, while the biggest losers include heavyweight giants dragging down the index. That’s why I look for cheap shares among the biggest fallers.

Cheap shares: Value trap #1

My first value trap is Informa (LSE: INF), the UK-based publisher, exhibitions group, and provider of business intelligence. Informa has global reach, with over 11,000 staff in more than 30 countries. Its five operating divisions “deliver events and exhibitions, create intelligence-based products and data-driven services, convene communities in person and digitally and provide access to cutting-edge research for customers working in specialist markets, worldwide.” At its current share price of 566.4p, Informa has a market value of £8.4bn. But I don’t think its shares are cheap enough.

The Informa share price hit a 52-week high of 875.4p on 27 December last year. During the spring market meltdown, it crashed to 326.7p on 23 March, so it’s bounced back hard since. To deal with the Covid-19 crisis, Informa cancelled its dividend and also raised £1bn in April in an emergency share sale. I think Informa is a great business, but it faces a tough couple of years. That’s because large-scale, in-person conferences and events cannot resume until widespread vaccinations are complete. For now, I’d steer clear of these ‘cheap shares’ as a value trap.

Value trap #2: Rolls-Royce

My second value trap is a venerable British institution: aero-engine maker Rolls-Royce Holdings (LSE: RR.). Like Informa, I think Rolls-Royce is an outstanding business and a global leader in its field. However, and as with Informa, Rolls-Royce’s destiny is largely out of its own hands for the next couple of years. With airmiles flown collapsing catastrophically in 2020, Rolls-Royce’s miles-flown operating model has been smashed to smithereens. What’s more, with air travel unlikely to return to 2019 levels before, say, 2023–24, Rolls-Royce faces strong headwinds. What’s more, its shares are not cheap enough.

What’s amazing about the Rolls-Royce share price is how steeply and quickly it soared recently. On 30 October the share price closed at 64.9p, but then came news of three effective Covid-19 vaccines. Since this low, the share price has rocketed as high as 137.45p (on 9 November) and stands at 127.55p today. In other words, this stock in a troubled business more than doubled in less than a fortnight. That’s far too much optimism for my blood, so I would not buy these ‘cheap shares’ at anything near the current price. To me, Rolls-Royce shares are a value trap waiting to catch unwary investors!