This Is the Market's Cheapest Stock

You may never have heard of Arkansas Best, but its 462% gain from 1999 through 2008 makes it one of the great success stories of the past decade.

So, what made Arkansas Best 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

1999 Price-to-Sales

1999 Price-to-Earnings

1999 Price-to-Book

Return 1999-2008

Arkansas Best

0.2

5.9

0.7

462%

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.

There's one company out there today that looks remarkably similar to Arkansas Best before its spectacular 10-year run -- TRW Automotive, the market's cheapest stock as of the start of 2009.

Company

2009 Price-to-Sales

2009 Price-to-Earnings

2009 Price-to-Book

TRW Automotive

0.2

1.7

0.7

Data from Capital IQ as of Dec. 31, 2008.

TRW Automotive looks pretty much like a can't-lose investment -- even if its earnings never grew, with a P/E of less than 2, you'd theoretically make all of your money back in just under two years. Except ...

Tomfoolery aside ...
I'm sure that recent events can pretty easily illustrate the fallacy in that line of thought.

About a year ago, Capital One (NYSE: COF  ) and Citigroup were trading for less than book value. But billions in losses later, the stocks are both down substantially, and could still be huge value traps. Because no one -- not investors, not financial pundits, not management, not even The Man Upstairs -- knows what their inscrutable assets and liabilities are. If you don't believe me, please turn to pages 28-38 of Citi's most recent 10-Q filing for a summary of its TARP and global risk exposure, and 39-46 for derivatives. (I'll save you some time: It's long, and there are lots of big, boring numbers.)

See, the trouble with backwards-looking multiples -- especially in this unusual environment -- is that they're, well, backwards-looking. They don't take into account future business prospects.

So, despite being the market's cheapest stock on a trailing multiple basis, TRW Automotive may not be a great stock for you to buy. The company has done an admirable job in the past few years growing sales and earnings while diversifying its customer base. Still, it operates in a pretty brutal, low-margin industry against more than 15 major competitors. And three of its top four customers, Ford, General Motors, and Chrysler, are struggling (as you may possibly have heard).

Taking into account future prospects, TRW Automotive may actually be more expensive than Google (Nasdaq: GOOG  ) , whose P/E is a somewhat lofty 30. That's because TRW Automotive lost more than $900 million in the final quarter of 2008, and it isn't expected to return to profitability until 2011. Meanwhile, Google generates nearly twice as much free cash flow as net income, has more than $17 billion in the bank, and is expected to continue growing.

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 2008

1999

Arkansas Best

0.2

5.9

0.7

462%

2000

Tenneco

0.2

1.9

0.1

(67%)

2001

Visteon

0.1

3.3

0.4

(97%)

2002

Industrias Bachoco

0.3

3.2

0.5

160%

2003

Reliant Energy

0.2

2.6

0.1

81%

 

Average

0.2

3.4

0.4

107%

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

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 2008

1999

Frontier Oil (NYSE: FTO  )

0.6

7.4

2.0

1,025%

2000

Cummins (NYSE: CMI  )

0.5

1.5

11.4

172%

2001

Terex (NYSE: TEX  )

0.6

2.5

1.0

114%

2002

Middleby (NYSE: MIDD  )

0.4

13.1

1.2

949%

2003

GameStop (NYSE: GME  )

0.3

14.3

1.1

342%

Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

While this is by no means a conclusive survey, we can draw a few important conclusions:

  1. With valuations so depressed right now, investors today are likely to see a high 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 that requires anticipating how the company will perform under future conditions. At Inside Value, The Motley Fool's value investing service, we also consider a company's competitive position, market opportunities, relationships with customers and suppliers, and the quality of its management when building our models.

Our Inside Value team has identified several bargain stocks that also have the competitive positioning to thrive in this market. You can click here to read about their favorite stocks free for the next 30 days. There's no obligation to subscribe.

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

Ilan Moscovitz owns shares of Google, a Motley Fool Rule Breakers selection. GameStop is a Stock Advisor pick. Middleby is a Motley Fool Hidden Gems selection. The Fool owns shares of Middleby and Terex and has a disclosure policy that makes us all proud.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 926197, ~/Articles/ArticleHandler.aspx, 10/25/2014 1:09:05 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement