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.
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.