On Friday, our Charts for the Curious highlighted that companies trading below 10x earnings had become remarkably rare. As promised, this piece is designed to add force to just how scarce these cheap firms are while highlighting the group that pay you to own them.

The first two charts of this piece will show you that truly cheap stocks have never been harder to find. Then we will explain why the companies that are cheap and top ranked by our models may offer terrific risk and reward. Out of all the stocks listed in the US only 18 pass this two part-test of being dirt cheap and still passing our rigorous screens.

These are wild times. There seems to be no end to the SPACs, “alt-coins” and meme stocks. Shiny financial objects are abundant today. We are nowhere near clever enough to figure all these new things out.

Over many decades it has been our experience that in times like these we should keep stuff simple. How simple? As simple as possible. That’s what this is all about. Buying cheap stuff that earns a bunch of money and pays you to own it.

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The Stock Market Cap of Firms Below 10x Earnings

The chart below shows the percentage of firms trading at 10x earnings or less has collapsed.

In 2009 the market hit lows that created a generational buying opportunity. Publicly traded companies saw their market capitalizations collapse. Despite being highlighted by Warren Buffet, investors were fearful.

At the market trough, the percentage of firms trading at less than 10x earnings soared to a record high of 40%. For conservative investors who followed a value-oriented discipline, this would prove to be a windfall as inexpensive and high quality firms were abundant and easy to find.

Today could not be more different. This next chart takes the market cap of all the firms trading below 10x earnings and divides it by the total market cap. Less than one half of one percent (0.49%) of the stock market is trading below 10x earnings today. That is the lowest observation in history.


The Best Stocks That Pay Dividends & Buyback Stock Below 10x Earnings

Post the 2009 crash, investors crowded into “low volatility,” “high dividend,” and other “low risk” strategies.  Our team wrote about the “bubble” in these perceived safety stocks and the opportunities in high volatility firms.  Many of those dividend strategies imploded and the stocks we advocated for went roaring higher.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

June 16, 2021 |

Categories: Quick Takes

June 16, 2021

Categories: Quick Takes

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