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Value shares are a favourite of British investors looking to get the best bang for their buck. In short, these are stocks that are temporarily trading below fair value due to external factors.
The logic’s simple: buy these undervalued shares when they’re cheap, hold them as the market comes to its senses, and maximise on the capital growth. But there’s a catch — some shares are cheap for the wrong reasons, ie: bad management, weak demand or operational inefficiency.
That’s where the distinction between a genuine value opportunity and a classic value trap becomes critical. So let’s consider two examples on the London Stock Exchange.
Jet2
The up-and-coming budget airline operator Jet2 (LSE:JET2) is a good example of what a credible value share could look like. On the surface, it’s exactly the kind of business nervous investors might shy away from. It’s exposed to the economic cycle, oil prices, consumer confidence, and even geopolitics.
When recession fears rise or headlines turn negative for travel, sentiment can swing sharply and the shares can de‑rate, making them look ‘cheap’ on earnings or cash flow measures.
But underneath that volatility, several traits suggest a more genuine value opportunity than a trap.
Critically, it has a diversified model, focusing heavily on package holidays with an integrated airline. This strategy tends to foster repeat custom and brand loyalty. Management’s also shown discipline in managing capacity and routes rather than chasing reckless growth, which matters when the cycle turns.
This reflects in its balance sheet, which has historically been more conservatively managed than some peers, giving it more resilience in downturns. So when the market’s pessimistic, there’s a strong argument to consider the shares at a discount based on the company’s long‑term earning power.
That’s the essence of a value share: temporary pessimism around a business that still has decent prospects.
Victrex
Now contrast that with Victrex (LSE:VCT), a stock that’s been frequently cited as a potential value trap in recent commentary. On a screener, it looks highly undervalued — the share price is down around 70% over five years, even as the broader FTSE 250 slowly gained.
The dividend yield has shot up towards double digits, which is undeniably attractive for income investors eyeing high‑yield opportunities. Looking at just those metrics, it’s easy to label it a bargain value share. But dig into the fundamentals and a more concerning story emerges.
The company has been investing heavily in new capacity and projects, but revenues and profits have declined rather than grown. This suggests poor returns on capital expenditure. Meanwhile, competitive and demand pressures have intensified, with weaker markets and trade frictions hurting its bottom line.
Now, that outsized dividend yield looks more like the result of a collapsing share price than a thriving cash machine. It’s fair to say that the payout may not be sustainable if earnings don’t recover.
The bottom line
There’s no guarantee Jet2 will recover this year. Equally, Victrex could implement a solid recovery strategy and shoot to new highs. But when assessing value shares, it pays to look closely at all factors.
Right now, if forced to choose between one or the other, I think Jet2 looks like a better option to consider. As always, within a diversified portfolio to help reduce risk while aiming for optimal returns.
