There is value, and then there is the illusion of value.

In the stock market, value also can be misleading. An investor sees a stock that has been marked down so much in a falling market that the price looks like a deal. Perhaps some analyst appears on TV touting the value and stating that the price, compared with the earnings the company is expected to generate, looks better than any time in recent years.

Typically, the analyst will talk about the P-E ratio, or the price of the stock compared with the earnings the company is expected to generate. Or maybe it’s the price-to-book ratio.

But at times like these, when analysts are just starting to come to grips with the realities of a recession and down market, the value stocks could be what are called value traps rather than actual deals. The fact that a stock has fallen doesn’t necessarily make it a bargain.

Savita Subramanian, a Merrill Lynch quantitative strategist, warned clients Monday to be careful of industries where there is no sign of an upturn in stock price performance.

While value managers, or the fund managers who are shopping for stocks that have fallen in the current environment, tend to say they spot bargains and buy them before the crowds, Subramanian noted that, in fact, the best bargain hunters are likely to be buying stocks later than their peers.

Searching for value is tricky, she notes. Roughly two out of three times, industries that are deeply discounted either stagnate or deteriorate further. She thinks airlines, semiconductor companies, financial firms and insurance companies are value traps now.

Likewise, Morgan Stanley analyst Abhijit Chakrabortti, said, We worry that valuations are deceptively ‘cheap.’

As investors peruse shares in the Standard & Poor’s 500, they should realize that profit margins are at multidecade highs, he said in a recent report. If a company has been recording strong profits already, why would that continue upward during an economic slowdown as companies and individuals pull back on purchases?

In the current environment, companies face a double challenge that is likely to erode profit margins, rather than carrying them higher. Consumers, both businesses and individuals, presumably will be reluctant to buy as they worry about the economy. Meanwhile, with many commodities at record-high prices, companies are struggling with those costs as they produce or deliver their products.

That leaves companies with a nasty decision: Do they raise their price to cover high energy and commodity expenses and risk losing more customers, or do they try to hold onto the customer and keep prices low? Either way, profit margins can suffer.

Chakrabortti is suspect of the sectors with earnings per share running furthest above the trend set over the past 15 years: Energy, materials, information technology, telecommunications, industrials and utilities.

Even with a flood of negative economic news during the last few days, Wall Street analysts are still adapting to the idea of a recession.

Goldman Sachs strategist David Kostin said they have yet to adjust their profit expectations. Although they have sobered somewhat, Kostin notes that P-E multiples are almost twice as high as has been experienced during the last four recessions.

When investors see an analyst proclaiming a cheap stock now, they need to be suspect about how P-E ratios are being calculated. If earnings expectations are based on a company’s recent performance, rather than the downturn that is likely to come, the price of a stock might seem like a bargain but not be a bargain at all. As earnings turn down, the price, compared with those earnings, could turn out to be excessive.

That’s not a pretty place to be as an investor. Those caught in value traps have a difficult time getting out at a decent price.

gmarksjarvis@tribune.com