1 Year Later: The Most Unfairly Punished Stock

One year ago, the market looked downright bleak. Fannie Mae (NYSE: FNM  ) and Freddie Mac went into conservatorship, Lehman Brothers was wrapped up in the arms of bankruptcy protection, and AIG (NYSE: AIG  ) was saved from the same fate only by government intervention.

But it wasn't just individual companies. The fundamental picture of the economy was deteriorating rapidly. Housing prices fell like Wile E. Coyote stepping off a cliff, banks started admitting that their balance sheets stunk like landfills, and consumers succumbed to the mountains of debt they had stacked up when credit was fast and easy.

You know the story … For investors, it was like being air dropped into a minefield. Because of this chaos, many stocks were unfairly punished. But which was the most unfairly punished? Let's find out.

Beware of exploding stocks
It's not hard to find stocks that were choked into submission by the falling market. Between Sept. 15, 2008, (the date of Lehman's bankruptcy) and the March 9, 2009, bottom, the S&P 500 index lost 43% of its value. But there were plenty of individual stocks that took a much bloodier beating. Here are just a few:

Company

Market Cap
on Sept. 15, 2008

Price Change

Las Vegas Sands

$12.6 billion

(96%)

Ambac Financial

$1.8 billion

(94%)

AIG

$12.8 billion

(93%)

Citigroup (NYSE: C  )

$82.9 billion

(93%)

ING Group

$57.6 billion

(87%)

Bank of America (NYSE: BAC  )

$121.1 billion

(86%)

U.S. Steel

$11.4 billion

(82%)

Source: Capital IQ, a division of Standard and Poor's.
Price change calculated between 9/15/08 and 3/9/09.

But in many of these cases, the companies were on the brink of extinction. Punished? Certainly. Unfairly punished? Probably not.

Babies, bathwater, and incredible returns
Panic is a fickle beast and it often leads investors to do silly things like sell stocks that really should be bought. Savvy investors didn't even need to wait for the March bottom. Those who were buying at the beginning of this year -- smack in the middle of the selling frenzy -- may well be sitting on doubles or better today. Here are just a few examples of hundreds that I found:

Company

Price Change

Genworth Financial

340%

Baidu

202%

Ford (NYSE: F  )

225%

Freeport-McMoRan

180%

Goldman Sachs

118%

Apple

117%

Starbucks (Nasdaq: SBUX  )

115%

Source: Capital IQ, a division of Standard and Poor's.
Price change calculated between 1/1/09 and 9/29/09.

The lesson here? Once again we see that temperament is a prized possession in an investor's toolbox. Those folks who had steely constitutions during the massive sell-off could have easily found ways to fill their portfolio with beaten-down stocks ready for a massive rally.

But the most unfair?
Obviously there were many stocks that traded down way too low and have since become huge gainers for investors who stepped in at the right time. But an upward price movement alone doesn't mean a stock was unfairly punished.

For example, the likes of Citigroup, Bank of America, and even Goldman Sachs just don't count as unfairly punished. Sure they were beaten up badly and have recovered significantly, but were they beaten up unfairly? I don't think so. What would have happened to these financial slicer and dicers if Uncle Sam hadn't stepped in?

Moving on ...

However, my pick for the most unfairly punished stock does come from the realm of finance. If you're a fan of fallen angel Bill Miller, then you're definitely familiar with Legg Mason (NYSE: LM  ) . The company is a massive fund manager that has been in existence since 1899 and, at the end of March, had more than $600 billion under management.

Between October 2007 and the market bottom, Legg Mason's stock fell 87%, putting its price-to-book valuation at a mere 0.3. It seemed clear that investors were betting that there was a good chance that the company would be blinked out of existence entirely. But even though Legg Mason's business saw some particularly dark days, it had a balance sheet that hardly threatened total collapse. Investors did end up realizing their mistake and Legg Mason's stock has more than tripled from its low point.

Now let me be clear, with hundreds of stocks losing more than half their value between late 2007 and this year's bottom, it's pretty much impossible to choose a single issue that got the rawest deal from Mr. Market. So I'm sure that there are plenty of opinions out there on which stock should be deemed "the most unfairly punished."

Scroll down to the comments section below and share your thoughts.

Baidu and Suntech Power Holdings are Motley Fool Rule Breakers selections. Apple and Starbucks are Motley Fool Stock Advisor recommendations. Starbucks is a Motley Fool Inside Value pick. The Fool owns shares of Legg Mason and Starbucks. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...


Read/Post Comments (21) | Recommend This Article (45)

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  • Report this Comment On September 30, 2009, at 4:21 PM, TMFThump wrote:

    I think I could make a case for ISRG being the most unfairly punished, which kept generating cash like it was in the mint business and has tripled off its lows. Still it never approached a price/book ratio in LM's territory. Supporting your position isn't too tough for me given that I rode the LM horse a loooooong way down from my initial purchase at $58 and change. Luckily I doubled down near the bottom before the market returned to its senses.

  • Report this Comment On September 30, 2009, at 5:11 PM, AubieFool wrote:

    Oh, I don't know....what about CROX? Up rather nicely in '09 after being crucified last year by MF's best and brightest.

  • Report this Comment On September 30, 2009, at 5:14 PM, MKArch wrote:

    If Chicos isn't the most unfairly punished it's got to be pretty close. They had ~$1.50 in cash and hit a share price of $1.72 even though they still had positive CFFO at the height of the downturn. Here is a company that grew revenues from $0.155B to $1.405B and EPS from $0.10 to $1.06 from 00-06. They had a minor fashion miss in 06 followed by a general decline in their market starting in 07 dropping EPS to 0.51 for 08 which was just a miserable year for retail in general. The market reacted by pricing them like they would never earn a cent again. I bought at ~$7.00 after their initial fall and averaged down at ~$3.00 and ~$2.00 for 2-7 baggers. I cashed most in recently but hold a little as they look to have recaptured some of their mojo.

    Mike

  • Report this Comment On September 30, 2009, at 5:58 PM, wolfhounds wrote:

    I agree with ISRG which I bought at 88. But you might want to consider VTIV which dropped from 30 to 7.62. It's now 16.5, not anything like a triple. But, along with ISRG, going forward has substantial potential. I also bought this between 7.80 and 11.5, and was happy to see SA pick it.

  • Report this Comment On September 30, 2009, at 6:27 PM, thisislabor wrote:

    Oh I get it. If the money supply is inflated you don't buy oil; not that path. You don't buy gold because it's not for sale, and those emotions frieking platinum anyways she wont sell me those... ever. You buy stocks, because these things will be coming back. Sorry, I really didn't know the answer.

  • Report this Comment On September 30, 2009, at 6:35 PM, tiger1980 wrote:

    ISRG is a great example, I have doubles and triples in

    STP, ISTA a 7X, F, BTE, MWE, X, and about 10 or 12 more. Just wish I had another 100,000 to do it again.

  • Report this Comment On September 30, 2009, at 6:44 PM, TMFKopp wrote:

    @AubieFool

    Of all the punished stocks out there you're going to have a tough time convincing me that CROX is among those unfairly punished. Without even going too far into it, did the stock really deserve the P/E multiple in the mid-to-upper 30s that it was getting in '06 and '07? Not a chance.

    Matt

  • Report this Comment On September 30, 2009, at 8:32 PM, mikecart1 wrote:

    LM? Get serious.

    How about IP? It went from $40/share to $3.93/share. It is a paper company! Everyone uses paper unless we are going to go back to writing on stones and wood.

    IP / LM

  • Report this Comment On September 30, 2009, at 8:39 PM, otatais wrote:

    cedc $6 to $32 now. you could argue people will drink more vodka in a hard times!

  • Report this Comment On September 30, 2009, at 8:58 PM, newtier1 wrote:

    So, in the interest of "full disclosure" as an experienced stock evaluator and writing in a stock advisory column months after the bottom, how many shares of LM did Matt Koppenheffer (and Bill Miller) pick up at the low? Why aren't we getting these suggestions when so called "unfairly punished stocks" are beaten up and are at their lows? Both competent and incompetent investors can look at a stock that has a tripled and say they thought it was "undervalued back then". We read and buy into the FOOL newsletters hoping someone actually knows more than the "average investor" and can point these things out at the bottom, not months later after anyone can see they tripled.

  • Report this Comment On September 30, 2009, at 10:19 PM, gdf55 wrote:

    GE also got taken out and shot. There was a point earlier in the year when everyone was scared that anything to do with financial services was doomed. I couldn't believe I was able to buy it at under $6. Now it's north of $16 and has a lot of room left to climb.

    Lots of perfectly good upscale retail stocks got hammered, too. COH and TPX have done very well for me since March. Not to mention AAPL - not exactly a precipitous plunge to the bottom, but up 250% since that point. FDX has doubled too.

  • Report this Comment On September 30, 2009, at 10:52 PM, baseballbill730 wrote:

    EVERYbody has 20 - 20 hindsight featuring woulda-coulda-shouldas. 90% of the stocks listed on the exchanges have doubled since early March. If they haven't, they are truly of the canine species. Thus this article is not exactly brimming with keen insight.

    I don't remember anybody, including MF, urging me to go on a buying spree last March. I did it anyway and I have the order confirmations to prove it. No, those weren't the only purchases I made over the past year. I'm not prescient enough to know when the market is going to bottom in any given cycle. The strategy is called dollar-cost averaging and I highly recommend it.

  • Report this Comment On October 01, 2009, at 10:48 AM, watersm wrote:

    Matt could have defined "unfairly punished." I would not define it as how big was the fall, nor how big was the rise afterward (though if markets were pure, you could make that argument). The obvious definition is the difference between the stock's bottom (or current) price and the stock's real value (potential for growth).

    Well, we can look up the current price, but the market itself debates the future value or potential of the company. That's where advisors earn their keep: predicting the future price.

    Disagreement about the future value is exactly what allows a stock trade; one person predicts growth, so they buy, and the other predicts a less rosey future, so they sell.

    As newtier1 says, we all want to know what will go up most before it does!

  • Report this Comment On October 01, 2009, at 6:22 PM, done4nau wrote:

    to this minute I cannot agree with the decision to "save" AIG. They (especially the bonus eating execs) haven't been punished enough. I don't think they COULD be punished enough.

  • Report this Comment On October 02, 2009, at 11:24 AM, japeel wrote:

    I notice there are a couple of comments about CROCS I'm cursing myself for not having the courage to buy at $0.78, and netting myself a nice 750% gain.

    In this case it's really cigar butt fundamentals al la Graham you have to look at. The company was valued at less than 10% net tangible assets, or price to book of 0.1!! Given the company’s recent poor history and the markets to date, PE is pretty much universally useless as a measure of value; it’s like using a candle in thick fog.

    Looking at the income statement, they are and have been generating revenues that track to about 550 to 600 million a year at worst. Now the company has been working like crazy to get its costs down, and if they manage to get somewhere near 2006 costs with current revenues, they become very profitable.

    2006 COGS = $154 mill

    2006 admin = $105 mill

    Total = $259 mill

    Lets say the don’t manage that, and it’s about double, alright $500 mill in total. Now, even with the current economy, they’re generating cash. The only question is will they be able to close factories, sack people and still manage to create new products, at $0.79 a share, double the cash reserve at the time I think it was probably a fairly decent bet. So for those attached to their price to earnings, if they managed to pull off 100 million in net earnings that would be 1.2 dollars a share before unusual and tax expenses. That’s a PE of dare I say it around 0.7 if you add in the tax, on todays price that’s a PE of around 6 and a price to book of 2.05.

    This was a no brainer really; I obviously didn't have a brain the day I decided not to buy it at $0.78.

    B.t..w. I hate the coloured clogs, but my bank balance isn't fashion conscious.

  • Report this Comment On October 02, 2009, at 1:55 PM, TMFKopp wrote:

    @ watersm

    "Matt could have defined "unfairly punished." I would not define it as how big was the fall, nor how big was the rise afterward"

    Graham said that the market can act as a voting machine or a weighing machine. Personally I like to use it as the latter and invest based on the idea that fundamentals will eventually be reflected in the price of a stock.

    Under the section header "Babies, bathwater..." I noted a number of stocks that have come back significantly from their bottoms. A quick look at just the gains can be seen as viewing what stocks investors have "voted" back into favor.

    In terms of LM, however, my case is based on the fact that when the stock was bottoming, fundamentals suggested that there was no good reason for the stock to be valued that low. Investors that noticed this discrepancy would have been able to rely on the market's weighing properties and trust that the price would again reflect the fundamentals.

    It's hard to make the same case for many other stocks that have had significant recoveries. Citi, for example, has flown back up, but during the darkest days of the financial crisis was there were dire issues facing the company and rather than fundamental reasons for the company to succeed, what we had was the hope that the government would step in.

    Re: Hindsight

    The point of this article is to look back at stocks that had been unfairly punished, so the point of the article is hindsight. Do I wish I had realized this about LM back in January or March rather than now? You bet. Kudos to those that did.

    Matt

  • Report this Comment On October 02, 2009, at 3:10 PM, DaBoss2 wrote:

    Aloha To all fools,

    How about the rental car industry, it was like their

    was nobody watching as HRZ,DTG & CAR went down like rocks in a pond. now back over 1000%

    in growth 6 months ago Dollar thrifty Group now at $23.00+ and if you were lucky you could have gotten it for under $1.00 AVIS/BUDGET now over $12.00

    dropped below .50 cents now HERTZ back over $10.00 from its lows in the $1.50 range. I bet that all three would not go down and bought a measly 1000 of each, I wish it had been 10,20, or 30,000 or more live and learn. Times like that were the proverbial when Blood runs in the streets. Will we see a replay, "THAT" is the question that we need the answers for. Keep your eye's open and trust your

    feelings, it a fools world so hold onto your wallet.

    to all a prosperous 09 and lets make 2010 the year of the investor Aloha

  • Report this Comment On October 05, 2009, at 5:26 AM, a2gsg wrote:

    GSAT

    i made a bundle shorting its previous incarnation (GSTRF).its current (re)incarnation still had some malaria from its previous incarnation, but is poised for a significant turnaround/upside comeback over the next 12 to 24 months with new management, investors and a fully funded biz plan in place, imho.

    for a recent Equity Analysis (9/28/09) see:

    http://devilcapital.com/investments/GSAT.html

  • Report this Comment On October 06, 2009, at 10:02 PM, freelivin91 wrote:

    What about PRU?

    From 111 down to 10, the market obviously corrected itself after that drop. Today it sits at roughly 50. Somewhere along the line, someone through this baby out with the bathwater.

  • Report this Comment On October 08, 2009, at 2:46 AM, dlcapo wrote:

    I couldn't believe it when I saw AUY @ $3.50 and bought plenty. Now that's unfairly beaten down. I'd love to get another shot like that again only this time I'd throw in a morgage for an extra hundred thousand shares. We're never happy with what we get.

  • Report this Comment On October 12, 2009, at 6:46 PM, mchuckie wrote:

    My vote goes to Textron. (TXT) Conglomerate that owns, among other things, Cessna and E-Z Go. Airplanes and golf carts. Two easy targets of the real fools in D.C.

    Not a bad company, just unfortunate markets. From $73 (Dec 07) to $3.57 (Mar 09) now back to $19.60 and climbing.

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