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Software, Food Retailers Are `Value Traps' in Bank of America's U.S. Model
Software development and food retailing are among U.S. industries that are value traps, made up of stocks whose valuations are low for good reason, according to Bank of America Corp.
Capital markets, consumer services, financial services, staples retailing, health-care equipment and supplies and specialty-retail stocks also made the list, Savita Subramanian, quantitative strategist at BofA Merrill Lynch Global Research, said in a note dated July 26.
All 10 industry groups that make up the Standard & Poor’s 500 Index are trading at a discount to their historical price- to-estimated-earnings-per-share ratios. That’s similar to 2008, when every industry except utilities was undervalued because prices fell faster than earnings deteriorated, the note said.
This time, some cheap valuations are underpinned by increasing earnings expectations, but that hasn’t hindered an increase in the number of industries BofA Merrill considers value traps.
“Valuation may be a false signal in certain pockets of the market,” Subramanian wrote. “These industries tend to remain trapped in this category until an external catalyst propels them out. Roughly three out of four times, industries that are identified as value traps have failed to outperform the market in the subsequent month,” the report said.
The S&P 500 has advanced 8.9 percent since July 2 amid optimism that second-quarter earnings will bolster the economy. Of the 189 companies in the S&P 500 that reported results since July 12, about 83 percent have beaten the average analyst profit forecast, while earnings per share have grown 60 percent, Bloomberg data shows. The gauge fell 16 percent from this year’s high in April through July 2 on concern that economic growth in the U.S. and China is slowing, pushing the price-to-earnings ratio down to 14.3, the lowest valuation since April 2009.
To contact the reporter on this story: Kelly Bit at kbit@bloomberg.net.
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