You may never have heard of
Arkansas Best , but its 462% gain between
1999 and 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 to 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.
One company out there today looks remarkably similar to
Arkansas Best before its spectacular 10-year run --
KV Pharmaceutical , the market's cheapest
stock.
Company
Price-to-Sales
Price-to-Earnings
Price-to-Book
KV Pharmaceutical
0.5
1.9
0.3
Data from Capital IQ as of Sept.
29, 2009.
This looks pretty much like a "can't-lose" investment.
Even if its earnings never grew, with a P/E of around 2,
you'd theoretically make all of your money back in about 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, Bank of America (NYSE: BAC), and
Bear Stearns were trading close to or below book value. But
billions in losses later, Bear Stearns was swallowed by
JPMorgan Chase (NYSE: JPM), while the other
two stocks are down more than 60% ... and might
stillbe
huge value traps.
Why? 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 38-44 of Citi's most
recent 10-Q filing for a
summaryof its TARP, subprime, and global risk
exposure, and to pages 45-53 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, KV wouldn't necessarily be a great
stock for you to buy. While the company has enjoyed
tremendous growth in recent years, it's had to lay off
workers and suspend some of its products pending an FDA
inspection.
Moreover, it recently replaced its chief financial
officer, and it could face delisting from the New York Stock
Exchange if it fails to submit its annual report (which had
been due in March, but was delayed because of an internal
audit investigation and the company's reorganization
efforts). If you're interested in buying KV, those are a few
things you'd want to look into first.
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
34%
2001
Visteon
0.1
3.3
0.4
(100%)
2002
Industrias Bachoco
0.3
3.2
0.5
271%
2003
Reliant Energy
0.2
2.6
0.1
58%
Average
0.2
3.4
0.4
Continued... |