Unfortunately, it’s very hard for certain companies to regain the trust of investors once they’ve lost it. In the case of Delta Air Lines (DAL), Citigroup (C), and General Motors (GM) stock, long-time investors have every right to be cautious about the cheap stocks due to the companies’ past troubles.
While each one of these companies has made major improvements to its business in recent years, their stock prices indicate that investors remain cautious about getting burned again.
Citigroup (C): King of Cheap Stocks
Investors lost a lot of money during the Financial Crisis, but Citigroup was one of the handful of “too big to fail” banks that was at the very epicenter of the problem. C stock paid the price for it, and became one of many, many cheap stocks that were cheap for a reason.
Not only did Citi’s reckless mortgage lending behavior require a $25 billion TARP bailout, the government had to tack on an extra $20 billion liquidity infusion to protect the financial system from Citi’s $300 billion toxic asset pool in 2008. Ultimately, the U.S. government had to temporarily buy 36% of all Citigroup stock to help the ailing bank navigate the crisis.
During that stretch, C stock lost more than 95% of its value. Now, eight years later, Citi has paid its fines, shored up its balance sheet and sold off more than $700 billion of its riskiest non-core assets. What’s left is a company that is generating consistent earnings that are currently at a post-crisis high, but a stock that trades at a P/E and forward P/E of only 7.2 and 6.6, respectively. Sure, Citi has burned investors in the past, but the balance sheet is better than ever and the bank’s margins should only get higher as interest rates rise.
General Motors (GM) Stock
GM shareholders were envious of even Citigroup’s 95 percent slide when they found out that the company would be going through bankruptcy restructuring that would result in the de-listing of the GM ticker in 2009. A combination of subpar vehicles, huge legacy healthcare and pension costs and gross mismanagement ended up digging GM stock into a hole that was too deep to climb out of when the financial crisis hit.
During and after the bankruptcy, GM sold off under-performing brands and shed the majority of its bad assets. Since the GM stock IPO in 2010 (post-bankruptcy, of course), the new GM has been a lean and mean profit machine. However, bankruptcies and government bailouts are a hard thing for investors to forget, and GM stock currently trades with a P/E and forward P/E around 5.0.
Delta Air Lines (DAL)
DAL stock owners are no strangers to bankruptcy either. Delta’s restructuring in 2007 involved massive layoffs and route cancellations and an eventual merger with Northwest Airlines. The cost-cutting has paid off for DAL in recent years, and the entire airline industry has been generating record profits. It’s the last industry where cheap stocks should be found with ease.
In the past, airline stocks have never found a way to remain profitable during U.S. economic recessions. However, according to J.P. Morgan analyst Jamie Baker, not only will DAL and the other U.S. airliners remain profitable during the next U.S. economic downturn, they are in a position to maintain margins above prior peak margins during previous market cycles. Unfortunately, one look at DAL stock’s P/E of 8.3 and forward P/E of 6.4 says the market will only believe it when it sees it.
The Bottom Line
There’s nothing wrong with investors being cautious with their money, especially when it comes to companies that have burned investors in the past. However, even after several years of consistent performance, Citi, GM and Delta’s stocks are still incredibly cheap stocks, trading with single-digit P/E ratios. One look at the performance of these companies suggests that it’s trust, not profits, that are the problem for these three names.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
