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Don't Get Caught Buying Sucker Stocks

How to avoid a classic value-investing mistake.

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My biggest investing mistake was buying a sucker stock. 

The name of the company was Pacific Dunlop (PDLPY), an Australian conglomerate that I bought in 1997 for what I thought was a song. I paid $10 a share, which was about 10 times earnings at the time. It’s now trading for a buck and change. What went wrong?You name it--restructuring charges, lawsuits, a weak Australian currency. It was a classic case of getting caught in the value trap: Buying a stock because it's cheap, only to find out it deserved to be even cheaper.

Sucker Stocks Abound
I ran a screen in our  Premium Stock Selectorfor stocks that, like Pacific Dunlop, are deceptively cheap. These are stocks that look great based on standard valuation metrics like P/E and price/book, but have mediocre star ratings. In other words, based on a more in-depth valuation analysis, our analysts think these stocks deserve a pass.

Haywood Kelly, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.