Since stocks are normally bought by private equity firms at substantial premiums to the current share-price, I have always assumed that they were a good thing for shareholders. But according to a piece in today's Financial Times, this may not be the case. A recent survey shows that private-equity deals are being done at only a small premium to the target's most recent highs. This is not a complaint that I understand. If a stock is at $25 and a company offers to buy it out for $40, isn't that good deal? The fact that the stock was at $40 a few months ago is no guarantee that it would have ended up back there.

Alan Klein makes the best case for why these deals are fair: "They are not forcing anyone to sell." One of the principles of economics is that "voluntary trade creates wealth." If a deal is not fair to shareholders, it is their prerogative to vote against it. I recently wrote about Seymour Holtzman, who is doing just that because he feels the proposed buy-out of Blair Corporation (AMEX:BL) is inadequate.

Bottom-line: It is the private equity firm's job to get the deal done at the lowest possible price. If shareholders aren't getting a fair price, it's because they or corporate management aren't doing their job. Don't blame the customer when you're selling your merchandise too cheap!

Every week it seems, my grandmother receives a catalog or three from Blair Corporation (AMEX: BL), which markets clothing and home products, mainly to older men and women. I had looked into the stock several months ago, but ultimately didn't buy it, even though it looked quite cheap. It had a yield in the 3% range, was trading close to its book value, and had low P/E and a price to sales ratio that was well below the industry norm. I didn't buy it because it looked like what is known as a "value trap" or, less charitably as "dead money." Read about companies like this on Internet message boards and you'll often find the acronym "POS." I'll leave you to decipher that one. Basically, I saw the stock as being undervalued but without any catalyst in sight to cause it to realize its value.

Today, Appleseeds Topco, a buyout outfit of some kind, agreed to purchase Blair for $42.50 per share, resulting in a 13.29% jump for this typically boring-to-watch stock. Was I wrong to pass on Blair? A look at the company's 5-year chart provides some evidence for my defense. Since 2002, the stock has fluctuated between 25 and a little over 40, and buying and holding the stock (assuming you weren't able to purchase it at its bottom) would have been unlikely to yield superior returns. Had you purchased the stock two years ago, you would have paid only a little bit below what the company was taken out for today. The main risk with buying these deep value, boring companies is the lack of a catalyst. If "buy and hold" is the mantra for growth investing, "buy and hope" might be the idea of deep value investing. The stock's under-performance for an extended period of time speaks volumes about management. I would even postulate that, most of the time, deep value Benjamin Graham type-stocks (low price-book) almost by definition have poor management.

And I say all this as a big fan of deep value investing, which you can learn more about in Benjamin Graham's classic The Intelligent Investor. To help to avoid the potential pitfalls of this often lucrative field of investing (David Dreman's book Contrarian Investing showed that buying low price-book stocks has historically outperformed the market by a wide margin over the long-term), I have a list of rules to screen out dead money, value-trap, POS's:

-Invest in companies where change seems imminent. If a company's shares are undervalued enough, activist investors may swoop in to try to shake things up. Keep track of 13-D filings (using the SEC's Edgar database) to find stocks where someone is accumulating a large stake. Then, research the investor to see what their track record is. Is it someone who has a history of launching proxy battles or persuading companies to put themselves up for sale?

-Look for signs of consolidation in the industry/broader market. When private equity firms are taking companies private at a record pace, many of these deep value stocks (like Blair) are well-positioned to be picked off.

-Look for situations where the management owns a large number of shares (this information can be found in the proxy statement). A manager with a large number of shares will benefit greatly from price appreciation. A manager with a large salary and little equity stake in the company may be happier to milk the company for cash and could care less about the stock price (former Lenox CEO Susan Engel says hi).

Do you have any of your own strategies for avoiding value traps? Post them here and I'll do a follow-up with your tips!