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 Continued... |