4 Stocks From the 2009 "Sucker's Rally" That Kept Soaring
The financial crisis ended -- at least where the markets are concerned -- four years ago. But some people couldn't believe it was over. On the way back up, they warned that it was a garbage rally, a sucker's game that would soon take adventurous investors to the poor house. Pundits and analysts pointed to dire financials and warned that soaring speculative selections might soon go the way of the dodo.
Plenty of stocks did go belly-up. But an elite few not only survived; they thrived -- producing outsized gains that have made the Dow Jones Industrial Average's four-year double look like pocket change. Make no mistake: These were some incredibly risky stocks to chase in the dark days of 2009, as you'll soon see from a few eye-popping then-and-now financial comparisons. Did you listen to the doomsayers and sit on the sidelines, or did you jump in with both feet, not knowing when (if ever) you might touch bottom?
Sucker's rally stocks that soared
The Dow bottomed out on March 9, 2009, after peaking in October 2007, and it's since recovered to set fresh all-time record highs. In the four years since that day, the index has gained 120%, which increases to 146% if its components' dividends are added to the calculation. That's not bad, but it can't hold a candle to these "garbage stocks" that turned out to be diamonds in the rough. Each has returned at least 1,000% since the end of the financial crisis crash, and some have recorded far greater gains than that:
Total Loss From Peak to Trough (07-09)
Market Cap at End of Crash
Total Return Since End of Crash
What a wild ride. Let's see how these companies have performed on a variety of metrics, both before and after the crash, to get a better understanding for why their stocks were so hated then -- and why they've since proved the doubters wrong.
What happened to International Paper?
- Trailing-12-month earnings per share in 2009: ($3.05)
- Most recent TTM earnings per share: $1.80
- Debt-to-cash ratio in 2009: 9.8
- Most recent debt-to-cash ratio: 7.4
- Total return from start of crash to today: 67%
On July 7, 2009, The Motley Fool's own Todd Wenning wrote:
Indeed, the futures of a number of well-known but heavily indebted American institutions were in serious doubt. International Paper ... [has] naturally been under tremendous pressure to shore up capital and responded by selling assets, refinancing existing debt, and ... slicing the dividend by 90%. Since March 9, International Paper shares have gained 237%. [This is just one] example of the recent "dash to trash" in this market rally.
International Paper has since addressed all of these problems. From 2009 to the start of 2012, the company reduced eliminated a quarter of its debt and more than doubled cash on hand. Its dividend also rose by 400% during this period of recovery. International Paper's buyout of Temple-Inland greatly reduced cash on hand and produced a slight increase in debt as well, but the company continued to boost its dividend, which is now more than 1,000% higher in raw payout terms than it was during the initial rebound. Paper may not be much of a growth industry, but keep in mind that at its lowest point, the company was still generating $25 billion in revenue and had earned more than $1 billion in net income in 2007, before the crash began.
What happened to Tenneco?
- Trailing-12-month earnings per share in 2009: ($8.95)
- Most recent TTM earnings per share: $4.50
- Debt-to-cash ratio in 2009: 11.5
- Most recent debt-to-cash ratio: 4.8
- Total return from start of crash to today: 27%
On Sept. 17, 2009, Thomas Ryan of Doddsville Investments wrote on Seeking Alpha:
It has become increasingly clear to us that the underlying fundamentals of both the U.S. and world economy do not justify the price increases in equities. Money is flowing directly from the world's biggest banks into the stock and commodity markets. Similar to when the Internet bubble was inflating, prices on many stocks have lost all connection to the underlying earnings power of the business. ... Tenneco made the top 10 list [of growth since the bottom] with a gain of 1,770%, while losing [this calculation includes another "garbage rally" stock not mentioned here] a combined $1.87 billion. ... [T]here is still a significant chance that some or all of the companies [on the author's list] will declare bankruptcy as well during the next year.
Nearly all of Tenneco's growth occurred by 2011 -- it's actually 13% lower today than it was at the start of that year -- but this is symptomatic of many auto stocks, which staged a strong recovery once it became apparent that the government wasn't going to let the industry implode. Tenneco's earnings per share have continued to increase another 300% since returning to profitability in 2010, and its single-digit P/E is near 10-year lows. You might have missed this rocket, but automotive stocks are notoriously cyclical -- there might be another megamultibagger in Tenneco's future after the next crash.
What happened to Dana Holding?
- Trailing-12-month earnings per share in 2009: ($2.00)
- Most recent TTM earnings per share: $1.40
- Debt-to-cash ratio in 2009: 0.4
- Most recent debt-to-cash ratio: 0.8
- Total return from start of crash to today: 42%
Thomas Ryan also had negative things to say about this company in the same article:
This rally is going to end in tears for those who hold on for too long. At some point reality will take hold, and there will be almost no place to hide. ... Many stocks were trading as if they were going into bankruptcy ... particularly in the consumer discretionary and retail space. The opportunities that existed have disappeared with the rally. 101 stocks [in Ryan's screener] have advanced more than 500% since this time. [One of the] the biggest winners ... Dana Holdings, up 2,230%. The net income of [this company] for the previous 12 months [was] negative $684 million.
Dana, like Tenneco, is a smaller auto-parts manufacturer that enjoyed nearly all of its meteoric growth between the end of the Dow's crash in 2009 and the start of 2011. It's grown much more than Tenneco despite a slower uptick in earnings per share over the post-crash period, in part because it had less debt to contend with. In fact, the company exited bankruptcy and returned to public markets at the start of the crash, and thus had a fairly hefty cash hoard and a streamlined balance sheet with which to hold the fort in the recession's darkest days. Even at the lowest point of the recession, Dana was still generating $5.2 billion in annual revenue, which was down from nearly $9 billion just before the crash started. Today, the company generates $7.2 billion -- but its profit margin is now consistently higher than it's ever been.
What happened to Sirius XM?
- Trailing-12-month earnings per share in 2009: ($2.45)
- Most recent TTM earnings per share: $0.51
- Debt-to-cash ratio in 2009: 8.5
- Most recent debt-to-cash ratio: 4.7
- Total return from start of crash to today: (7%)
On Sept. 10, 2009, the Fool's Rick Munarriz, a longtime Sirius XM bull, wrote:
I'm going to throw some numbers at you. See if you can guess what they are:
- 2006: 3.2 million
- 2007: 4.4 million
- 2008: 6.1 million
Net subscriber additions? You wish. Howard Stern fans who have migrated to satellite radio? Not quite. We're looking at the number of combined Sirius and XM subscribers who cancelled their service.
As great as satellite radio may be, 6.1 million accounts -- more than a third of its base at the start of 2008 -- deactivated. Some listeners can't pay. Some simply won't. ... Several aspects of Sirius XM's model have already peaked:
- The sheer number of net subscriber additions topped out in 2006.
- Retail subscriber totals maxed out in 2007.
- Overall subscribers hit a peak in 2008.
By this point, Sirius had already rebounded 356% from the end of Dow's slide. To his credit, Rick also offered several reasons not to worry about the satellite-radio provider that same day.
Sirius was fighting for its life under a mountain of debt and subscriber defections in 2009, but it has since exceeded the expectations of all but the most bullish of 2009's speculative bulls. Its most recent quarter showed record revenue and subscriber numbers -- a 75% increase on the former and a 26% increase in the latter metric since the end of the recession. Debt has also been reduced by 20% since the end of the crash, and much of the rest has been refinanced at better interest rates. Not only is Sirius growing, but it's also generating more revenue (and profit, which Sirius reached at the end of 2010) from each subscriber even as Internet radio continues to bleed cash with every new subscriber. The company's stock is now very near its all-time highs, which should soon be within reach as long as it maintains this positive momentum.
Even though Sirius XM is one of the market's biggest winners since bottoming out three years ago, there is still some healthy upside to be had if things go right for it -- and plenty of risk for a fall if things don't. Read all about Sirius in our brand-new premium research report. To get started, just click here now.
The article 4 Stocks From the 2009 "Sucker's Rally" That Kept Soaring originally appeared on Fool.com.Fool contributor Alex Planes and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.