What would happen if you bought the cheapest stock in each of the major stock market sectors?
I’ve explored that question in 11 columns, from 2002 through 2006, and from 2013 to the present. I call this concept the Cheapskate Portfolio. I think it can be a way to find a bargain here and there.
This year I restrict the portfolio to U.S.-based companies. Eligible stocks need a market value of $1 billion or more, and can’t have debt that exceeds stockholders’ equity. The stocks I’m highlighting sell for 3 to 11 times earnings, in a market where the average earnings multiple is 21.
In telecommunications, there are no extremely cheap stocks, but AT&T(T) sells for 11 times earnings. The dividend yield, which is above 6%, is the chief attraction, but it might need to be cut in the next year or two.
In the financial realm, the cheapo is FS KKR Capital (FSK), a closed-end investment fund that makes loans to middle-market companies. It trades for less than three times last year’s earnings, which were great, and about eight times expected earnings, which are more normal.
With oil selling for about half of its peak level, energy stocks remain out of favor--none more so than Gulfport Energy (GPOR), an exploration and production company based in Oklahoma City. It drills for gas and oil, mostly in shale formations in Ohio and Oklahoma. There are legitimate things to worry about here, but a valuation of three times earnings makes up for a multitude of sins.
Among industrial stocks, Hawaiian Holdings (HA) has the lowest price/earnings ratio, a little less than seven. This airline connects the Hawaiian islands with each other and with the world. Airline stocks are often cheap, but I think this one is a decent long-term holding.
The cheapest stock in the technology sector is LiveRamp Holdings(RAMP) at four times earnings. The San Francisco company is working in the nascent area of addressable television, in which viewers see ads that are relevant to them.
In the materials sector, the “winner” is Met Warrior coal (HCC). The company, based in Brookwood, Alabama, runs mines of metallurgical coal, used to make steel. The stock sells for a little more than two times earnings. Investors are scared by environmental issues and by bankruptcy at a predecessor company. For the moment, though, the coal industry has a friend in the White House.
In the real estate sector, Medical Properties Trust (MPW) goes for six times earnings. This real estate investment trust, based in Birmingham, Alabama, owns buildings used by hospitals and other healthcare facilities. Profits have been consistent but often puny. Last year was a good year.
In consumer cyclicals, the cheapest stock around (at eight times earnings) is TRI Pointe Group (TPH), a homebuilder from Irvine, California. Millennials have a lot of debt, and may not buy houses with the fervor their parents did. But homebuilders’ stock prices already reflect that, in my view.
A small biotech company, United Therapeutics (UTHR) is the least expensive stock in the healthcare field, as it was last year. Its forte is drugs for hypertension in the pulmonary arteries. At seven to eight times earnings, I think the stock is a good value.
In consumer staples, Walgreens Boots Alliance (WBA), which owns thousands of drugstores in the U.S. and Britain, is the least expensive stock at about 10 times earnings. Investors view the concept of “Medicare for All,” espoused by Senator Bernie Sanders and other leading Democrats, as a threat to drugstore chains and their pharmacy-benefit management units.
In the utility sector, almost no utilities meet my debt limit, and none of those sell for 15 times earnings or less. So, I will skip that sector this year.
Buying the cheapest stock in each sector would have worked poorly last year--a bad year for value. The ten stocks I discussed a year ago fell 9.4%, even after taking dividends into account. By comparison, the Standard & Poor’s 500 Index rose 10.9%.
That unfavorable result tilted the long-run results for the first time in favor of the S&P 500. The 11-year average one-year return is 10.8% for the index, 9.1% for the Cheapskate stocks. However, academic studies and experience make me suspect that the Cheapskate stocks will make a comeback.