This Is the Market's Cheapest Stock Right Now

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, Tenneco 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

Tenneco

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 Tenneco before its spectacular run: Chinese jewelry-maker Fuqi International, currently the market's cheapest stock.

Company

Price-to-Sales

Price-to-Earnings

Price-to-Book

Fuqi

0.1

2.2

0.5

Data from Capital IQ, a division of Standard & Poor's.

This looks pretty much like a "can't-lose" investment. Even if its earnings never grew, with a P/E of approximately 2, you'd theoretically make all of your money back in just over two 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 was trading for book value. But billions in losses later, it's down another 80%, and it could still be a huge value trap.

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.

Yes, it sports higher growth rates and trades at lower multiples than fellow jewelry retailers Tiffany (NYSE: TIF  ) or Blue Nile. But investors are sketched out; last March, the company announced it had discovered "accounting irregularities" that led to restatements and a long filing delay for its 2009 10-K. A law firm accused the company of fraud, and the SEC opened up its own investigation into Fuqi. The company was nearly delisted by the Nasdaq following a failure to file financial reports, though it's been granted an extension until late March to get its paperwork in order.

Given these issues, Fuqi might not be as great a stock as, say, China Security & Surveillance (NYSE: CSR  ) , WellPoint (NYSE: WLP  ) , or UnitedHealth Group (NYSE: UNH  ) , three companies with much stronger competitive positions and better reputations for disclosure than Fuqi, but which also came high up on the list of market's cheapest stocks.

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:

  1. With some valuations so depressed right now, investors today are likely to see a number of strong performers in the coming years.
  2. 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.

If you're interested in a few thoroughly vetted dirt cheap stocks that one of our top experts likes right now, simply enter your email address is the box below for access to videos detailing three ideas of Tom Jacobs, lead advisor for Motley Fool Special Opportunities, along with more information about the real money portfolio service he manages.

This article was originally published May 22, 2009. It has been updated.

Ilan Moscovitz doesn't own shares of any company mentioned. UnitedHealth Group and WellPoint are Motley Fool Inside Value recommendations. Blue Nile is a Motley Fool Rule Breakers choice. UnitedHealth Group is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group. The Fool owns shares of UnitedHealth Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (9)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 07, 2011, at 2:05 PM, NewConstructs wrote:

    To get to the real profits of a business, you have to go MUCH farther than the author suggests. His analysis is focused in the right direction, but he only scratches the surface. The link below provides details on hidden charges and income that you can't find by looking at the income statement, cash flow statement or balance sheet. You have to analyze the Footnotes.

    Proof is in our report (free) available at the link below.

    Most investors will be sur­prised to learn that we found over 13,000 one-time items buried in nor­mal line items in the MD&A and Foot­notes of 10-K fil­ings from 1998 thru 2/15/2011. And don’t think for a sec­ond that these one-time items are not mate­r­ial. Dur­ing the last reported fis­cal year, com­pa­nies con­cealed over $41 bil­lion in one-time items.

    http://blog.newconstructs.com/2011/03/01/red-flag-report-wha...

  • Report this Comment On May 31, 2011, at 6:04 AM, Samfund wrote:

    Interesting piece....think cheapest stock with torrid sustainable growth is Apple....http://seekingalpha.com/article/272344-apple-the-most-underv...

  • Report this Comment On November 30, 2011, at 8:43 AM, Karin123 wrote:

    US currency now undermined for the sake of Euro. We are part of the bail out plan for Greece and Italy:

    http://www.forexpros.com/news/forex-news/forex---dollar-fall...

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