Blue chips are a perennial favourite amongst Singapore investors. They are widely associated with reliable dividends, operational stability, and long-term wealth appreciation. But even the greatest companies can lose their competitive edge over time. When structural deterioration sets in, a stock that appears cheap and attractive may actually be something far more dangerous: a value trap.

What Is a Value Trap?

Simply put, a value trap is a stock that appears cheap based on traditional valuation metrics – such as low price-to-earnings (P/E) or price-to-book (P/B) ratios – but continues to underperform because its underlying business fundamentals are permanently weakening. Investors often mistake a low price for good value, believing they are securing a bargain, only to discover later that the company’s problems are secular and difficult to reverse. Some common red flags include declining earnings, unsustainable dividend payouts, and persistent operational challenges. The pummelled prices appear to be a bargain, especially if the company boasts a long history of capital appreciation,...