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:

*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.

*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, Citigroup (NYSE:C) was trading for a seemingly cheap 0.8 times book value. But $21 billion in losses later, the stock is down 83%, and it could still be a huge value trap. Because no one -- not investors, not financial pundits, not management, not even The Man Upstairs -- knows what Citigroup's 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 Apple (NASDAQ:AAPL), whose P/E is a somewhat lofty 22. 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, Apple is expected to continue growing earnings, generates nearly twice as much free cash flow as net income, and has more than $25 billion in the bank.

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 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.

Ilan Moscovitz owns shares of Apple, a Motley Fool Stock Advisor selection. Petrobras is an Income Investor pick. The Fool has a disclosure policy that makes us all proud.