The six cheapest stocks in February
Posted on March 5, 2009 by Richard Beddard
Filed Under Companies, Investing, Naked PE |
A glimmer of light?
Here are the six cheapest stocks on the market, as of February 10, according to Dr Keith Anderson’s Naked PE ratio.
The Naked PE improves on the predictive power of the plain ordinary PE ratio by using the last eight years of earnings instead of just one to measure a company’s earning power, and by making various econometric adjustments for a company’s size and business sector.
As 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 six stocks had returned gut-wrenching losses since we started publishing them in February 2007.
November’s portfolio, however, has made a handsome return in three months. £6,000 invested, £1,000, in each stock was worth about £7,620 last Friday due to bounces in the share prices of housebuilders Taylor Wimpey and Barratt, and retailer DSG International.
The housebuilders remain in February’s selection but thanks to the rise in its share price, DSG is now only the 13th cheapest stock on the market.
Despite the possibility of success last month, our experience since 2007 shows that buying the six cheapest stocks when they first appear in the tables, while it worked for decades before, can be disastrous.
Just to illustrate the point, Johnston Press, STV, and JJB are all down significantly since 10 February.
Even the successes of last November; Taylor Wimpey, Barratt, and DSG had appeared in lists dating back as far as the previous November, and would be making substantial losses had an investor bought them then. That’s why Keith stresses patience. He’s prepared to wait up to two years before buying a low Naked PE share.
Keith creates portfolios of six stocks because his back testing showed that a concentrated portfolio performed best. One question I mean to ask him, perhaps for our May update, is whether larger portfolios would have done better over the last few years, and whether lower returns in good years would have been a price worth paying.
Incidentally, 374 stocks meet Keith’s criteria of positive earnings in each of the last eight years. Their aggregate eight-year PE ratio is 5.8 compared to 5.9 in November. In other words, the market is slightly cheaper. He says:
I still think it is a huge buying opportunity, provided people choose their companies carefully.
Footnotes:
- For an explanation of how Keith calculates the Naked PE, see his academic papers.
- We publish the six cheapest stocks on the market every quarter. Here’s the archive.
Comments
2 Responses to “The six cheapest stocks in February”
Leave a Reply
your table header says 2008 - do you mean 08 or 09? (reckon it might be a typo)
atb
B
Ah, thanks, it is a typo. Thanks for pointing it out, I’ll change it right away!