You may never have heard of Arkansas Best, but its 462% gain between 1999 and 2009 makes it one of the great success stories of the past decade or so.

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 -2009

Arkansas Best 0.2 5.9 0.7 467%

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 -- Imperial Sugar (Nasdaq: IPSU), currently the market's cheapest stock.

Company

Price-to-Sales

Price-to-Earnings

Price-to-Book

Imperial Sugar 0.2 1.1 0.7

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 1, you'd theoretically make all of your money back in a single year.

Except...

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

In mid-2008, Bank of America (NYSE: BAC) was trading for less than book value. But billions in losses later, it's been cut in half again, 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 what its inscrutable assets and liabilities are. If you don't believe me, please turn to pages 118-202 of B of A's most recent 10-K filing for the footnotes to its financial statements. Pay close attention to pages 120-146 if you're curious about its derivatives exposure, impaired loans, and securitizations. (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, Imperial Sugar wouldn't necessarily be a great stock for you to buy. The company's operations aren't profitable -- had it not been for a huge insurance settlement related to a refinery accident, the company would have actually lost money.

Furthermore, sugar refining is a fairly brutal commodity industry. (Imperial Sugar is actually the successor company to the Imperial Sugar that went bankrupt in 2001.) While a small number of competitors -- notably the American Crystal Sugar cooperative -- manage to earn high returns, pricing for Imperial's products depends mostly on government regulation, slow-growing domestic sugar demand, and trade disputes with Mexican sugar exporters.

You can contrast Imperial's gross margin (negative 2.3%) with those of higher-value food producers like Kraft (NYSE: KFT) (37.1%) or PepsiCo (NYSE: PEP) (54.4%) to get a sense of just how enormously valuable these companies' brands are.

Imperial Sugar might not be as great a stock as, say, China Security & Surveillance (NYSE: CSR) or Aetna (NYSE: AET), two companies that may have stronger competitive positions than Imperial, but which came close to being the market's cheapest stock.

Despite its numerical "cheapness," you could make a strong case that Imperial's valuation isn't as attractive as, say, Apple (Nasdaq: AAPL), whose P/E is a loftier 21. While Imperial is free cash flow-negative and would have lost money without the aforementioned insurance settlement, Apple is growing rapidly and has more than $50 billion in 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:

Year

Company

Price-to-Sales

Price-to-Earnings

Price-to-Book

Return Through 2009

1999 Arkansas Best 0.2 5.9 0.7 467%
2000 Tenneco 0.2 1.9 0.1 96%
2001 Visteon 0.1 3.3 0.4 (100%)
2002 Industrias Bachoco 0.3 3.2 0.5 317%
2003 RRI Energy 0.2 2.6 0.1 79%
  Average 3.4 3.4 0.4 172%

Data from Yahoo! Finance and Capital IQ.

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

1999 Sasol 0.8 7.1 1.0 1,419%
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.

At Million Dollar Portfolio, 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. If you're interested in finding out more about Million Dollar Portfolio, simply enter your email address in the box below.

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

Ilan Moscovitz doesn't own shares of any company mentioned. Apple is a Motley Fool Stock Advisor recommendation. Industrias Bachoco is a former Motley Fool Global Gains recommendation. PepsiCo and Sasol are Motley Fool Income Investorselections. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Apple.

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