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:
- 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.
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.
