The cheapest six stocks in November
Posted on December 10, 2008 by Richard Beddard
Filed Under Naked PE |
Here are the cheapest six stocks in November, as measured by Dr Keith Anderson’s Naked Price Earnings ratio:
As I’ve described many times, this measure boosts the predictive power of the PE by accounting for a company’s long-term profit record, its size, and its business. In other words, companies with low PE ratios do slightly better than companies with high PE ratios, but companies with low Naked PE ratios do much better than companies with high Naked PE ratios.
That’s the historical record, anyway. For the last two years we’ve been tracking the six cheapest stocks on the market according to the Naked PE, and they’ve done dreadfully. That’s contrary to Keith’s research, and in some ways, it’s contrary to common sense because you’d expect companies with long unbroken records of profitability, to go on being successful.
Not once between 1975 and 2003 did a company in one of his test portfolios go bust, and in only two years did a test portfolio lose money. Since February 2007, I’ve published eight portfolios using the same Naked PE statistic and although its early days for some, they’re all losing money. Four companies – Mice, Inter Link Foods, SCS Upholstery and, just this Monday, Wagon – have gone into administration.
The worst performing portfolio of all is the one created this time last year. A thousand pounds invested in each of the six cheapest stocks then, would have left you with £861 in total a year later (including charges, but not including dividends):
A loss of eighty-six per cent severely tests my faith in the Naked PE, at least, on its own, but since the beginning, Keith has stressed that investors should exercise discretion by using the Naked PE with other measures of a company’s financial strength. Investors should be patient too. He waits, often for two years after his system flags up a company, until he’s confident it will survive.
So, nearly two years into our experiment, we’re starting to generate a list of potential survivors. Since some of these companies have been among the cheapest six more than once, I’ve included the date they first qualified. Bionostics, since taken-over, is the only share to have risen in value so far:
Keith says:
At some point either these sort of stocks will show stunning returns, or we are looking at the end of capitalism as we know it, in which case we won’t have much time to worry about our former portfolios.
Why would companies like these recover so strongly? Investors have given up on them so the beady-eyed faithful have a chance of spotting a recovery before the herd charge in, and while prices are still very low.
Human beings are by nature optimistic. It’s hard work following the dregs of the stockmarket. They’re not companies that you’re likely to read about in the newspapers, or see on television, unless the news is really bad, and they don’t make for good conversation in the pub. In fact, if you mention them, people think you’re crazy, or stupid.
It’s a tough job, but someone’s got to do it. So we’re sticking with the Naked PE. The next update is in February.
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3 Responses to “The cheapest six stocks in November”
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Not really sure why you’re so bullish on Trinity Mirror. Graham would take one look at the debt that they have onboard and then run a mile.
Hi Carrigaline, thanks for your comment.
Actually, I’m not bullish about Trinity Mirror. Apart from the debt, the competitive pressure in news and and classified ads is so intense it’s difficult to imagine the industry can ever reach its former levels of profitability. I think Graham would have doubted the relevance of TNI’s earnings record too. I think, one or both of these criticisms could be levied at most of the companies in the list, it is after all a list of the cheapest stocks in the market which is another way of saying they’re the most unpopular!
[...] I wrote in November’s update, in recent years the Naked PE has not lived up to its promise and each of Keith’s portfolios of [...]