This Is the Market's Cheapest Stock

You may never have heard of Arkansas Best, but its 382% gain since the start of 1999 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:

*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 -- Crosstex Energy, currently the market's cheapest stock.

*Data from Capital IQ as of June 30, 2009.

Crosstex looks pretty much like a "can't-lose" investment -- even if its earnings never grew, with a P/E of less than 3, you'd theoretically make all of your money back in just under three 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, E*TRADE (NASDAQ:ETFC) and Citigroup were trading for less than book value. But big losses later, the stocks are down more than 50%, and they might 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 backward-looking multiples -- especially in this unusual environment -- is that they're, well, backward-looking. They don't take into account future business prospects.

So, despite being the market's cheapest stock on a trailing multiple basis, Crosstex may not be a great stock for you to buy. It operates in a commodity industry against tough lower-cost producers like ONEOK and Enterprise Transfer. At a time of high-profile cutbacks in the natural gas industry by strong names like Chesapeake Energy (NYSE:CHK), Crosstex depends on a few key customers that are in danger of failing. And while Crosstex is trying to sell assets to reduce its debt burden, it owes more than $1.3 billion. That's a lot of money for a company with $50 million in operating income -- an amount that isn't enough to cover its interest payments.

Taking into account future prospects, Crosstex may not be as great an investment as Oracle (NASDAQ:ORCL), whose P/E is a much loftier 20. That's because Crosstex is expected to lose money until at least 2013. Meanwhile, Oracle generates far more free cash flow than net income, is expected to continue growing, and has net cash on its balance sheet.

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:

*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:

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

While this comparison 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 doesn’t own shares of any companies mentioned in this article. Chesapeake Energy is an Inside Value selection, and the Fool owns shares of it. The Fool has a disclosure policy that makes us all proud.