4 shares Fools think are terrible value traps

Not all value shares are made equal… Here, four Fools explain why they’re steering clear of the stocks in question.

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WWBGD — or, what would Benjamin Graham do? Many investors ask themselves this when assessing whether a company’s shares may represent decent value or not.

Below are four that a handful of TMF UK’s contract writers are avoiding, and their reasons why…

Barclays

What it does: Barclays is a global financial services firm specialising in commercial & investment banking as well as credit cards.

By Zaven Boyrazian. Despite rising interest rates creating a long-overdue ideal lending environment for banks, the UK’s leading financial institutions continue to look strangely cheap.

In particular, Barclays (LSE:BARC) shares are currently trading at a P/E ratio of just 4.3. And with attributable profits surging by 26% to £3.1bn in the first six months of 2023, management has hiked dividends and initiated a £750m share buyback programme.

However, as encouraging as this performance appears on the surface, there seems to be a brewing problem under the surface. Not everyone can afford the higher interest rates. And customers are starting to default on their loans.

The bank has written off a total of £896m in credit impairment charges. That’s 162% higher than a year ago. And it seems the current consensus points to even higher impairments throughout the rest of 2023.

Barclay isn’t in any immediate financial trouble. But the affordability of its financial products appears to be dwindling. And with interest rates expected to eventually decline again, profits may fall with it, stopping the gravy train.

Zaven Boyrazian does not own shares in Barclays.

Currys

What it does: Currys is a leading retailer of technology products and services, operating online and through 823 stores in 8 countries.

By Matthew Dumigan. Analysts have been talking about cheap UK shares for a while. But not all cheap shares are undervalued.

I think some are experiencing price declines for valid reasons and look set to continue underperforming due to fundamental weaknesses.

In my opinion, one such example is Currys (LSE:CURY). The well-known technology retailer has been among the worst performing FTSE 250 stocks for some time. Its share price has fallen by almost 70% in the last two years.

With a valuation well below the long-term average, now could be an opportune time to buy shares at a significant discount. But at just under 50p, Currys shares still aren’t cheap enough to tempt me.

In July, full-year revenue fell 7% to £9.5bn on a like-for-like basis. Worryingly, there were declines in all markets except Greece.

I don’t see much room for improvement in the near-term future either since consumers are unlikely to justify huge spending on computers and gadgets while recovering from a cost-of-living crisis.

Matthew Dumigan does not own shares in Currys.

Ocado

What it does: Ocado Group provides a technology platform for retailers building e-commerce operations in their markets. 

By Paul Summers: Ocado (LSE: OCDO) shares may be doing well in 2023 but they’re still massively down on where they were at the height of the pandemic. In fact, most of the recent rally appears to be due to chatter of a possible bid from Amazon rather than anything else. 

It’s not that I don’t find the company’s technology impressive – it clearly is. However, a market cap approaching £7bn feels excessive considering how long it takes for contracts to be delivered and the fact that Ocado is still loss-making. 

Should a bid actually materialise, my call could prove hopelessly wrong. However, I’m looking to build my wealth by buying stakes in companies that have solid records of generating higher profits year after year, not by those whose success depends on a deep-pocketed suitor. History shows that the former has always been a more reliable strategy. 

Paul Summers has no position in Ocado or Amazon

Tesco 

What it does: Tesco is Britain’s biggest retailer and also has stores in Ireland, the Czech Republic, Hungary and Slovakia.

By Royston Wild. At face value, the Tesco (LSE:TSCO) share price offers excellent all-round value. The retailer trades on a forward price-to-earnings (P/E) ratio of 11.7 times at the time of writing, below the FTSE 100 average of 14 times. 

Meanwhile the dividend yield sits at 4.3% for 2023, comfortably beating the 3.8% FTSE index average. 

Food retailers like are popular lifeboats for investors in tough times like these. But I believe the risks of buying Tesco shares make it a poor investment despite their cheapness. 

This is because profits are coming under increasing pressure as price wars heat up and costs spiral. Adjusted operating margins at Tesco’s retail arm dropped more than half a percent in the last financial year (ending March 2023), to 3.8%. Consequently adjusted operating profit slumped 6.9% to £2.6bn. 

Rising competition from discounters mean the pressure to cut prices should intensify, too. Recently, the grocer announced price cuts on another 50 items as it battles back against Aldi and Lidl. 

Royston Wild does not own shares in Tesco.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Amazon.com, Barclays Plc, Ocado Group Plc, and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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