Sometimes shares get sold off to such a degree that they begin to look like bargains. But just because a share looks like a bargain, doesn't necessarily mean it is one.
The term "value trap" is often used to refer to this scenario. A value trap is loosely described as a share which appears to be cheap because it has been trading on a low earnings multiple for a reasonable amount of time.
Eventually the investor falls into the trap of buying the share, only to find the share price never ends up improving.
There are a number of shares on the ASX which have suffered severe declines and now trade at low multiples.
The question is whether they are bargains or potential value traps? Two are as follows:
Cabcharge Australia Limited (ASX: CAB)
Cabcharge is a prime example of a company that has been disrupted by modern technology. The emergence of ride-sharing app Uber in Australia has been a disaster for the company. It was only two years ago that there were calls for Cabcharge's near-monopoly on the industry to be ended.
Unsurprisingly Cabcharge's share price is down 31% in the last 12 months as shareholders head for the exits. This has left the shares trading at just 8x earnings, making them appear cheap. But I would avoid them at all costs.
It's not just Uber that shareholders have to worry about. Its Australian competitor goCatch has been growing at a strong rate and attracted investments from James Packer and SEEK Limited (ASX: SEK) co-founder Paul Bassat. This could spell big trouble for Cabcharge's long-term future.
Select Harvests Limited (ASX: SHV)
Priced at just 5x trailing earnings Select Harvests certainly appears to be very cheap even though its share price has risen by almost 10% this week.
The good performance of its share price cannot hide the fact that the company is having a shocking year. So far in 2016 its shareholders have endured a decline of 48%, making it one of the worst performers on the ASX.
This isn't entirely surprising, though. Select Harvests is a producer and distributor of almonds. Operating in such a niche market means the company will be subject to wild swings in almond prices.
Having been at record highs in 2014, almond prices came crashing down recently thanks to oversupply. As it could be some time before supply and demand finds its equilibrium I would suggest avoiding Select Harvests no matter how tempting it may appear to be.
Finally, with Select Harvests' shareholders nursing a loss of 48% this year, it makes this report about what you should do in the event of a market crash all the more important in my opinion.
