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, but thrived, producing outsize gains that have made the Dow Jones Industrial Average's four-year double look like chump 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 of 2007, and it has since recovered to set fresh all-time 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:
|Stock||Total Loss from Peak to Trough (2007-2009)||Market Cap at End of Crash||Total Return Since End of Crash|
|Fifth Third Bancorp (NASDAQ:FITB)||(96%)||$802.6 million||1,150%|
|Office Depot Inc (NYSE:ODP)||(97%)||$162.2 million||600%|
|Krispy Kreme Doughnuts (NYSE:KKD)||(74%)||$74.3 million||1,240%|
|American International Group (NYSE:AIG)||(99%)||$788.7 million||575%|
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 of why their stocks were so hated then -- and why they've since proven the doubters wrong.
What happened to Fifth Third Bancorp (NASDAQ:FITB)?
Trailing-12-month earnings per share in 2009: -$3.94 Most recent TTM earnings per share: $1.66 Debt-to-cash ratio in 2009: 5 Most recent debt-to-cash ratio: 2.9 Total return from start of crash to today: -47%
On June 4, 2009, Ben Steverman of Bloomberg Businessweek cited market strategist Doug Peta:
The recent rally "is a necessary consequence after the real beating that equity markets have taken," Peta says. He notes that Fifth Third Bancorp (NASDAQ:FITB) stock at one point hit $1 per share, a sure sign the bank's survival was in doubt. But, after the Federal Reserve completed its so-called stress test of major banks, worries about Fifth Third eased and the stock jumped above $8. "Now, [investors believe] Fifth Third is going to survive -- the government has said so," Peta says. "It's getting to trade on more traditional metrics."
Fifth Third was in the same boat as many other regional banks coming out of the recession. However, its problems were magnified by the size of its bailout -- $3.4 billion, which ultimately resulted in nearly $600 million in profit to the government by the time Fifth Third paid it off in early 2011. Nearly all of Fifth Third's gain occurred by the end of 2010 and was largely built on a rebound in the bank's price-to-book ratio. The bank hasn't done much for shareholders since that time, and its most recent stress test results show that there's still a way to go before Fifth Third Bancorp (NASDAQ:FITB) is back on a rock-solid foundation.
What happened to Office Depot Inc (NYSE:ODP)?
Trailing-12-month earnings per share in 2009: -$5.42 Most recent TTM earnings per share: -$0.39 Debt-to-cash ratio in 2009: 4.4 Most recent debt-to-cash ratio: 0.7 Total return from start of crash to today: -81%
Ben Steverman had this to say about Office Depot Inc (NYSE:ODP) in the same article:
The market's rally was led by stocks like Office Depot, up 742%. ... For years, Jeremy Grantham, co-founder of investment manager, was a bearish, pessimistic investor, but in early March he suggested stocks could be at their bottom. Like many investors, however, Grantham was surprised by how disproportionately the rally came from low-quality stocks, he said in a recent speech at the Morningstar Investment Conference. "It's a junk rally," Grantham said. Rutherford Investment Management president William Rutherford agrees, calling the past three months a "dash to trash." Rutherford's funds had stuck with high-quality stocks that he was sure would make it through the financial crisis and recession. As a result, he says, "We missed out on a lot of [the] increase."
Office Depot Inc (NYSE:ODP) posted all of its gains by the middle of 2010 -- despite a 2012 surge, it remains 25% below its value at the start of 2011. The second-string office supply retailer has had difficulties maintaining profitability, and free cash flow has been in decline since 2009 as well. On the plus side, Office Depot's cash pile is up significantly, and its debt recently dropped by a quarter. A merger agreement with OfficeMax Inc (NYSE:OMX) sent shares spiking last month, but investors remain unsure as to how they should approach this new tie-up.
What happened to Krispy Kreme Doughnuts (NYSE:KKD)?
Trailing-12-month earnings per share in 2009: -$0.06 Most recent TTM earnings per share: $2.23 Debt-to-cash ratio in 2009: 2.1 Most recent debt-to-cash ratio: 0.5 Total return from start of crash to today: 248%
On April 20, 2009, Josh Brown of the Reformed Broker blog wrote: