What separates a successful value investor from the pack? Experience. The world's top value investors will tell you that they all began their careers by buying value stocks too early. With time, they learned to avoid such a mistake. They all have war stories about such "value traps."

But how can you identify -- and avoid -- such stocks? And when do these stocks morph into compelling opportunities? The signposts are quite simple.

Let me cite large mining equipment provider Joy Global, Inc. (NYSE: JOY) as an example.

At the start of 2015, this company's stock had already seen a 30% pullback from its 52-week-high, and was trading for less than six times cyclical peak earnings (of $7.18 a share, earned back in fiscal (October) 2012). Such low multiples on deep cycle stocks often bring out the value investors, who begin to accumulate shares in anticipation of an eventual cyclical upturn. Not this time. Buying shares in early 2015 would have been disastrous.

Why was this a stock to avoid? First, because commodity prices have remained in freefall. As long as prices for iron ore, gold and other metals are falling, demand for mining equipment is bound to continue to weaken. Indeed there is such a glut of relatively new mining equipment now on sale in the used equipment market that Joy Global's revenue outlook may not yet have bottomed out. The company's sales are expected to drop more than 10% in fiscal (October) 2015, and expectations of revenue stabilization in fiscal 2016 now seem premature.

Second, analysts are not yet done cutting profit estimates.  The current profit outlook for fiscal 2015 and 2016 has been dropping over the past 60 to 90 days, and history suggests that earnings revisions tend to continue in the same direction for an extended period. It's the "death by a thousand cuts" mentality that characterizes much of today's Wall Street analysis.

Yet at some point this value trap will morph into an opportunity. The just-noted factors will play a role: When sales and profit forecasts start to see upward revisions, then value investors will surely start to note just how cheap this stock is in relation to peak-of-the-cycle profits.

But there's another factor that successful value investors look for: share price traction. Simply put, there is no shame in missing out on a 10-15% rebound in this stock. I'm not talking about a sideways trend, but a clear-cut upward trend. When sales and profit forecasts are seeing upward revisions, and shares have moved back into the low $30's, you'll know that the most savvy value investors are ready to focus on this company's cyclical upturn.

The Time Is Right For These Value Opportunities
Now, let's look at a pair of examples of value traps that are now becoming value opportunities.

Citigroup, Inc. (NYSE: C) which has largely missed out on the share price gains posted by key rivals, is finally starting to win converts. Shares wobbled between the upper $40's and the low $50's for most of the past few years, but have moved up into the upper $50's in recent weeks and months. What has changed? The bank's extensive clean-up efforts are finally yielding a payoff, and value investors are now embracing a more robust set of financial results. More importantly -- investors have noted an improving profit outlook for the banking sector. As an added kicker, this banking stock trades for less than 10 times projected 2016 profits.

Last autumn, I profiled the catalysts in place for this once-lagging bank stock on our sister site, ProfitableTrading.com. Notably, Citigroup's book value remains on an upward march. Analysts at Merrill Lynch anticipate book value per share reaching $77 by the end of next year. With shares trading below $60, this is clearly a value stock that is beginning to win adherents.

Savvy value investors also look to other signposts for a timely investment. One of my favorite catalysts: insider buying. In recent weeks, three separate insiders have acquired a collective $260,000 in stock of propane distributor FerrellGas Partners LP (NYSE: FGP).  The value catalyst: a 10% dividend yield.

Equally important, this stock appears to have hit bottom, and in recent weeks and has begun to reverse course. That's one more piece of assurance that a value trap is morphing into a value opportunity. Still, I'd like to see a process of upward earnings revisions take root.

Risks To Consider: As is often the case with many value stocks, you shouldn't expect a linear rebound. These kinds of stocks tend to adhere to the three-steps-forward-two-steps-back rule, so don't be discouraged if they need time to consolidate at current levels before making their next upward move.

Action To Take--> The best value investors approach such stocks with a simple game plan: study, study and study some more. There is no hurry when a deep value stock is meandering at multi-year lows. You can take ample time to do your homework, and you'll be sufficiently knowledgeable about the business when it comes time to pull the trigger.

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