I’m avoiding these FTSE ‘value’ stocks like the plague!

Value stocks have the potential to be brilliant investments but value ‘traps’ can destroy wealth. Our writer picks out what he believes are two of the latter.

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Research has consistently shown that value stocks can massively outperform the market over the very long term. But investors still have to be careful. What seems like a bargain can sometimes turn into a costly mistake.

Share price crash

Shoe-seller Dr Martens (LSE: DOCS) is one example. This has been a catastrophic investment for anyone unlucky enough to hold its stock. Since listing in 2021, the share price has fallen just under 90%.

Frankly, I’m not surprised. While I’ve long been a fan of its legendary boots (and still own a pair!), it’s easy to see how a cost-of-living crisis and operational missteps could impact sentiment.

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After a spate of profit warnings, it seems institutional investors have had enough too. Goldman Sachs recently dumped 70 million shares at 57.85p. That wasn’t just a lot of stock. It was also at a 9.8% discount to the previous day’s closing price.

Created with Highcharts 11.4.3Dr. Martens Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Is the fall overdone?

In its most recent update — in July — the company said that trading had been “in line with expectations” (although it’s worth questioning just how high those expectations were). Guidance for FY25 was maintained and costs are also being cut where possible.

In addition to this, the forecast dividend yield stands at a chunky 4.9%. However, I wonder whether another cut might be on the cards if trading doesn’t improve dramatically in the second-half as management expects.

Dr Martens is an iconic brand. I doubt we’re seeing the final chapter in its story. But the risk of it trading sideways (or worse) for months and years while other stocks rocket higher is too great, in my view.

Market leader

Another company I’m steering clear of is Carnival (LSE: CCL), even though the shares certainly look like they’re in bargain territory.

A forecast price-to-earnings (P/E) ratio of just 10 for FY25 (beginning in December) isn’t only below the long-term average among UK stocks, it also feels screamingly cheap considering this is the largest cruise operator in the world and the popularity of such holidays is growing among all age groups.

Created with Highcharts 11.4.3Carnival & Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Cheap for a reason

My issue with Carnival’s quite simple, namely the amount of debt on its books. This ballooned during the Covid-19 pandemic (even docked ships still require maintenance) and now stands at well over the market- cap of the actual company!

Yes, we’ve seen the resurgence in travel since the bug was sent packing. But what happens if another economic crisis hits and investors sprint for the lifeboats again?

A creaking balance sheet also means that a resumption of dividends – my principal reason for once holding a stake — looks very unlikely in the near term. So investors aren’t even being paid to wait for a recovery.

Now, it could be argued that the gradual lowering of interest rates could help with the debt situation. It may also lead more would-be cruisers to throw caution to the wind and book a holiday.

But we could say that about any business that does well when levels of discretionary income rise. Why take on the additional risk here when there are far more attractive options elsewhere?

With Carnival, it’s a case of ‘once bitten, twice shy’ with me.

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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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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