The IMF trims its economic growth forecast again as the U.S.-China trade war continues, Brexit worries linger and inflation remains muted.Economyread more
Citigroup thinks Tesla investors hoping for a post-earnings rally later this week should scrutinize a pair of related financial metrics.Investingread more
Olive branches were extended from both China and the U.S. as the two nations are set to restart face-to-face trade negotiations after a monthlong truce.Marketsread more
Coca-Cola topped Wall Street's expectations for earnings and revenue.Food & Beverageread more
New disclosures show Facebook and Amazon each spent more than $4 million on lobbying activity in the second quarter of 2019.Technologyread more
Boris Johnson, one of the biggest voices in the Brexit movement, wins the Conservative Party leadership race by a 2-1 margin.Europe Politicsread more
Disney can nearly double its earnings by 2024, Morgan Stanley said in a note to clients on Tuesday.Investingread more
Amazon is expected to report its second-quarter earnings on Thursday.Investingread more
The largest residential brokerage company in the U.S. is partnering with the largest online retailer in a strategy to boost sales for both.Real Estateread more
Here are the biggest calls on Wall Street on TuesdayInvestingread more
Canaccord Genuity's Tony Dwyer believes stocks are about to fall as much as 5% from their all-time highs.Trading Nationread more
Jim Cramer considers it his job to make sure that investors don't let Thursday's market bounce lure them into value traps. He sees a ton of value-trap stocks lingering out there, and they could be incredibly dangerous.
A value trap is a stock that appears to be cheap because it has a low price-to-earnings multiple but is deceiving because the actual earnings estimates are too high. So, when the numbers come down, the stock gets crushed.
"This can be a difficult concept for people, since the price-to-earnings multiple or P/E ratio, is the No. 1 metric we use to value stocks and determine whether they are cheap or expensive," the "Mad Money " host said.
Many use the P/E ratio as a tool to figure out what the market is willing to pay for a company's future earnings. Stock prices can vary widely, so the P/E ratio can be considered an apples-to-apples comparison.
To calculate the P/E ratio, investors can divide the price-per-share of the stock by the earnings-per-share.
But be careful.
Typically if a stock has a low P/E ratio, investors view it as being inexpensive. However, there are stocks with incredibly low P/E ratios that can languish for years or even be obliterated.
"Those are value traps and they can fool you if you don't know what to watch out for," Cramer said.
Read more from Mad Money with Jim Cramer
To determine if a P/E ratio is suspicious, Cramer said to keep in mind that valuing stocks has two components. The first is the fluctuation of multiple, or what he will pay for earnings and the other part of the equation are the actual earnings themselves.
If the earnings estimates are too high, then a very low multiple can be a red flag. This signals that the numbers may have to be cut. Rising and falling earnings estimates are the top driver of stock prices.
Consider the case of Ensco, one the world's largest offshore oil drillers. Right now the average stock in the sells for about 16 times earnings. Ensco appears to be incredibly cheap, trading at just 4.7 Wall Street's estimate of $2.27 per share.
Given that Ensco's stock is down 80 percent in the past two years, one might think that this would be an amazing bargain — but that would be wrong.
The problem is that the reason why the P/E ratio looks so low right now is because earnings estimates are still too high. The company's core offshore drilling business is eroding quickly, especially with crude down at $31 a barrel.
Cramer interprets the low multiple as a signal that investors do not trust that Ensco will even come close to meeting the earnings estimates. That makes this a prime candidate for being a value trap stock, and Cramer thinks it can go lower. Once investors lose faith in earnings, the P/E ratio is meaningless.
"If today's buoyant market makes you want to pick stocks with low price-to-earnings multiples that have already been hammered, just remember that not everything with a low multiple actually counts as cheap," Cramer said.