Welcome to my latest video presentation, for Friday, April 12. Below is a condensed transcript; the video contains additional charts and details.

The father of value investing, Benjamin Graham, famously said: “Price is what you pay; value is what you get.”

In this presentation, I’ll show you how to prevent getting burned by cheap stocks that deserve to be cheap.

First, let’s take a look at the market action this week.

So far in 2024, inflation reports have generally come in hotter-than-expected. On Wednesday, the consumer price index (CPI) for March was released and it rattled investors.

Inflation ran hot for a third consecutive month in March, raising doubts about when the Federal Reserve will cut interest rates. Odds that we’ll get a cut in June have greatly diminished, souring Wall Street’s mood.

Overall prices increased 3.5% from a year earlier, up from 3.2% in February, driven largely by the rising cost of rent and gasoline, according to the U.S. Bureau of Labor Statistics (BLS). On a monthly basis, the CPI rose 0.4%, similar to the previous month. Economists had expected 3.4% and 0.3%, respectively.

Core CPI, which excludes volatile food and energy components and is watched more closely by the Fed, rose 0.4% in March, topping an expected 0.3% but in line with February’s rise. That kept the annual increase in core CPI at 3.8%.

The BLS reported Thursday that the producer price index (PPI), which measures wholesale prices, rose less than expected in March. Wall Street was relieved but it’s clear that inflation remains too high for the Fed’s comfort.

The PPI increased 0.2% for the month, less than the consensus estimate of 0.3% and not as much as the 0.6% increase in February. However, on a 12-month basis, PPI rose 2.1%, the biggest gain since April 2023.

Excluding food and energy, core PPI rose 0.2%, in line with expectations. Excluding trade services from the core level, the increase was 0.2% monthly but 2.8% from a year ago.

March’s PPI gain was propelled by services, which saw a 0.3% increase on the month. Conversely, goods prices decreased 0.1%, compared to a 1.2% increase in February.

Accordingly, the benchmark 10-year U.S. Treasury yield has been rising and currently hovers at 4.56%, an elevated level that’s putting pressure on equities.

This inflation and interest rate data has led to a volatile week, with stocks swooning and then bouncing back and then swooning again. I’m bullish over the long-term but near-term pullbacks are probably in the cards.

Sifting through the bargain bin…

During these sell-offs, should you buy on the dips? Yes, but you must be highly selective. There’s a Wall Street saying: never try to catch a falling knife. A falling investment could rebound. Or it could lose more value. Trying to predict the bottom is like grabbing a knife on its way down. Pain usually ensues.

That said, I don’t dread corrections. I welcome them. During this powerful market rally, stocks have gotten expensive, especially in the technology sector. Pullbacks can be healthy; they present opportunities to buy inherently valuable stocks on the cheap. But you need to be selective.

Here are 10 signs to help you identify a value trap:

1) The stock is underperforming its entire sector. It’s one thing to decline along with the broader market; it’s another to perform worse than your peers.

2) The company shows a pattern of declining market share. Innovation never stands still. The future belongs to no single company; no competitive advantage is unassailable. Declining market share can turn into an unstoppable death spiral.

3) Over-promising but under-delivering. Quarterly results are where the rubber hits the road. Beware of overly hyped companies with managers that talk a good game but then miss expectations repeatedly.

4) Insufficient cash flow to cover debt expense. The cash ratio helps discern a company’s ability to pay short-term debt obligations. It is calculated by dividing current assets by current liabilities. A ratio higher than one shows a solid chance of paying off debt; a ratio of less than one could indicate an unmanageable debt burden.

5) High levels of insider selling. If corporate insiders are dumping a stock, they know something that the rest of us don’t. It’s a tip-off that the people running the company realize that the stock is about to under-perform the market.

6) Over-dependence on a specific product. Mega-cap icon Apple (NSDQ: AAPL) made a fortune from its iPod; the company recently discontinued the product because it has been superseded by the iPhone. Other companies aren’t as proactive when it comes to fading products that once served as blockbusters.

7) High turnover in the C-suite. When key executives don’t last very long and frequently jump ship, that’s a sign the company is rudderless and about to strike a reef.

Case in point: In March, a series of safety scandals compelled Boeing (NYSE: BA) to fire its CEO and other top executives. Once a blue-chip stalwart in retirement portfolios, Boeing’s stock is down more than 25% year to date.

8) Consistently trading at low multiples, versus key statistics such as earnings, cash flow, and book value. That’s an indicator of low future promise.

9) Lack of institutional investment. When a stock has high institutional ownership, it’s a vote of confidence from the “smart money.”

10) Dividend reductions. If a company you own has slashed its payout, watch for falling or volatile profitability. Beware of an excessively high dividend yield compared to peers.

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John Persinos is the editorial director of Investing Daily.

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