You may never have heard of Tenneco, but its 135% gain between 2000 and 2010 makes it one of the great success stories over a difficult last decade.
So what made Tenneco so special? A decade ago, the stock was cheap. And I mean dirt cheap.
Using Capital IQ, an institutional database, I ranked the 1999 stock universe by price-to-sales, price-to-earnings, and price-to-book multiples, and ordered the stocks by their combined rankings. Based on how it stacked up against the rest, Arkansas Best was literally the market's cheapest stock. It was one of those rare "no-brainer" bets that made a small number of savvy investors rich:
Company |
2000 Price-to-Sales |
2000 Price-to-Earnings |
2000 Price-to-Book |
Return, 2000 -2010 |
---|---|---|---|---|
Arkansas Best | 0.2 | 1.9 | 0.1 | 135% |
Data from Capital IQ, a division of Standard & Poor's; includes companies traded on major U.S. exchanges with market capitalizations greater than $100 million.
One company out there today looks remarkably similar to Arkansas Best before its spectacular run: Chinese jewelry-maker Fuqi International
Company |
Price-to-Sales |
Price-to-Earnings |
Price-to-Book |
---|---|---|---|
Fuqi International | 0.3 | 2.6 | 0.6 |
Data from Capital IQ.
This looks pretty much like a "can't-lose" investment. Even if its earnings never grew, with a P/E of approximately 3, you'd theoretically make all of your money back under three years.
Except...
Tomfoolery aside...
I'm sure that recent events can pretty easily illustrate the fallacy in that line of thought.
In early 2008, Citigroup
Why? Because no one -- not investors, not financial pundits, not management, not even The Man Upstairs -- knows for certain what its inscrutable assets and liabilities are. If you don't believe me, please turn to pages 61-99 of Citi's most recent 10-K filing for an overview of its global risk profile. Pay close attention to pages 52, 53, and 100-102 for an abbreviated glimpse of off-balance-sheet arrangements, contractual obligations, and derivatives.
Not sure whether Citi improved its internal controls on the heels of its contested SEC settlement over understated investments linked to subprime mortgages? You can find controls and procedures, plus footnotes to the 10-K, on pages 115-257. (I'll save you some time: It's long, and there are lots of big, boring numbers.)
See, the trouble with backward-looking multiples -- especially in this unusual environment -- is that they're, well, backward-looking. They don't take into account future business prospects and reporting issues.
So despite being the market's cheapest stock on a trailing-multiple basis, Fuqi wouldn't necessarily be a great stock for you to buy.
Yes, it sports higher growth rates and trades at lower multiples than fellow jewelry retailers Zale
Fuqi might not be as great a stock as, say, Wet Seal
But just in case you're curious ...
You may be interested to see how much money you could have made buying the lowest-multiple stocks in the past:
Year |
Company |
Price-to-Sales |
Price-to-Earnings |
Price-to-Book |
Return Through 2010 |
---|---|---|---|---|---|
2000 | Tenneco | 0.2 | 1.9 | 0.1 | 135% |
2001 | Visteon | 0.1 | 3.3 | 0.4 | (100%) |
2002 | Industrias Bachoco | 0.3 | 3.2 | 0.5 | 348% |
2003 | RRI Energy | 0.2 | 2.6 | 0.1 | 79%* |
Average | 2.0 | 2.8 | 0.3 | 116% |
Data from Yahoo! Finance and Capital IQ.
*Through 2009; RRI was acquired.
Those are some impressive, albeit inconsistent, gains. Of course, you could have made even more money investing in a number of other value stocks, though they may have appeared somewhat pricier based on a cursory look at their multiples. Consider these monster performers:
Year |
Company |
Price-to-Sales |
Price-to-Earnings |
Price-to-Book |
Return Through 2009 |
---|---|---|---|---|---|
2000 | Walter Industries | 1.8 | 5.0 | 0.8 | 1,438% |
2001 | Occidental Petroleum | 1.4 | 5.2 | 2.0 | 729% |
2002 | Southern Copper | 1.4 | 14.6 | 0.8 | 2,651% |
2003 | Fluor | 0.1 | 14.3 | 2.6 | 248% |
Data from Yahoo! Finance and Capital IQ.
While this comparison is by no means a conclusive survey, we can draw a couple of important conclusions:
- With some valuations so depressed right now, investors today are likely to see a number of strong performers in the coming years.
- The "cheapest" stocks on a multiples basis are not always the best value stocks.
Point taken
While I've shown you which name the multiples tell us is the market's cheapest stock, I should caution that it's not one I would recommend buying. As investors, we should always keep in mind that valuation is a forward-looking exercise, which requires anticipating how the company will perform under future conditions.
At Motley Fool Pro, The Motley Fool's real-money investing service, we also consider a company's competitive position, its market opportunities, its relationships with customers and suppliers, and the quality of its management when building our models. Our team of analysts has identified several bargain stocks that also have the competitive positioning to thrive in this market, and they use options to help leverage their knowledge.
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