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Pro Analysis

Santoli: 2016 is the year of the value trap

Traders work on the floor of the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange.

The market has imposed a high cost on the owners of "cheap" stocks this year.

Buying the shares that look least expensive based on a company's reported or projected earnings over a 12-month span has been a ticket to a value trap for a while now.

The route followed by Ford last week drove this point home. The stock, already trading beneath seven times expected 2016 profits – less than half the broad market's valuation – fell more than 8 percent after reporting moderately disappointing results.

In fact, the 10 cheapest-looking stocks in the Standard & Poor's 500 at the start of 2016 based on forecast earnings were down an average of 9.5 percent this year as of Friday, compared to a gain of more than 6 percent for the S&P itself. That list, aside from Ford, would have included General Motors; the airlines American and Delta; biotech giant Gilead Sciences; and Eastman Chemical. The list also included a couple of winners, such as power producer AES and retailer GameStop, but not nearly enough to compensate for the losers.