Stock of the Week: This Services Stock Is Beating the Market Headwinds

|June 17, 2022

Despite the headwinds in the market – and there are plenty – I’ve got a great Stock of the Week for you this week.

It’s a company with lots of diversity – what we call horizontal integration – in its offerings.

Demand is growing for its services as people and businesses come out of COVID-19.

But it’s not the story I’m interested in… it’s the numbers.

A recent buyout will generate an additional $1 billion revenue…

The company meets my proprietary Growth-Value-Income rating…

The stock is already up 20% this year… It’s not being dragged down by the overall market…

And it has low volatility. In this kind of market, that’s crucial.

Get all the details on the stock – including the ticker – in this week’s Stock of the Week.

Click on the image below to watch the video.

Transcript

I’ve got a great Stock of the Week for you this week.

I say that even with the headwinds we’re seeing in the market. Yes, it’s time to be a bit more cautious. We can have great companies – all the numbers look great, the fundamentals look great – but the headwinds of the broader market are pushing everything down.

When you consider that in the past week every single stock in the S&P 500 has gone down, are you telling me all those companies are rubbish?

Of course not.

So while I might love some of these companies, we’ve got to remember the context. We’ve got to do our due diligence.

That’s what’s brought me to ABM Industries (ABM). The company provides integrated facility solutions through five segments: business and industry, aviation, technology and manufacturing, education, and technical solutions.

I like that diversity – what you might call horizontal integration. That gives it some protection.

The majority of the company’s revenue is derived from the business and industry segment, which includes janitorial facilities engineering, parking services, commercial real estate properties, sports, entertainment venues, and vehicle maintenance and other services for rental cars.

As we come out of COVID-19, this company comes across our radar. But we’re more interested not in the story but what the numbers for the company look like.

A recent buyout of Able Services added $1.1 billion in engineering and janitorial services revenues. We’re talking sizable numbers here. And again, in this kind of environment, with these headwinds, I want a solid company with good numbers, big numbers in place.

What else caught our attention?

The stock was up in 2019, 2020 and 2021, and so far this year, it’s doing well.

My Growth-Value-Income rating comes in at a 9 out of 10. That’s good. Remember, this is my proprietary algorithm, which I use to look at the valuation of a company, the revenue growth of a company… dividend yields, cash flow… all of these factors.

CROCI – cash return on capital invested – is 9%. Now, if you’re a regular reader or part of my GVI Investor research service, you know that the cash return on capital invested has been shown to be, as a measure of cash flow, a very important component for determining future price movements.

It doesn’t guarantee that prices will go up, but the research done by Deutsche Bank, now copied by Goldman Sachs and given to their wealthiest clients, shows that those companies in the top quartile generally generate about a 40% annual return.

ABM’s stock price has gone up solidly over the last six months. The Sortino ratio, a measure of reward versus risk, is a little bit low, but nothing that I’m worried about.

Volatility is low. In this environment, I don’t want high volatility because the markets are falling – and probably will continue to fall for a bit longer. Therefore, I want less volatile companies. And again, the research shows lower-volatility companies tend to do better over the longer term, even if they don’t get the headlines because they’re not making big moves in the short term.

Always keep in mind that not even the best-returning companies always have fantastic numbers on absolutely everything. Running a business, trying to get everything right, is pretty difficult. Sometimes profitability isn’t growing at the same speed as turnover, and you might have to borrow in the short term.

So everything doesn’t always get greenlighted. But with this company, I like the turnover. It’s holding up well after several years of growth. Total borrowing is steady. It increased significantly about five years ago, but it’s holding steady now. Operating cash flow is good. Profits are holding steady after having kind of blip up. Total assets aregrowing, and pretax profits are strong and solid. All of those things are attractive.

Now, I can go back to the company’s story and say, “Well, look at all these other services that they provide as the economy comes out of COVID-19…”

And you might say, “Well, wait a minute. What about the fact that we’ve got a rising cost of living, rising inflation, fears of rising interest rates and potentially a recession? Surely companies like this would be impacted.”

Those are the headwinds I’m talking about.

So if you’re risk-averse, you might say, “Well, I’ll just keep an eye on this. Looks good, but let’s keep an eye on it.”

And if you are thinking, “Well, yeah, it’s all very well. But this is one which has got those solid fundamentals I’mlooking to hold for a longer period of time than just a week or a month or three months,” then you’re more likely to say, “Yeah. Okay. That’s all right. Solid, sound.”

The stock price has had a bit of momentum so far this year, and I expect that to continue.

As I said, with anything in this market, you’ve got to be cautious, because regardless of the company, because of the headwinds… it’s like flying a plane. Say you’re trying to get from New York to London. If there are massive headwinds, it’s just going to take longer. It’s not a reflection on the quality of the plane. It’s a reflection on the environment you’re flying in.

That’s the kind of environment we’re in. Sometimes it’s like this. At the moment, we’re not in a choppy market. Volatility is mostly to the downside.

That means the trends are smoother. We know the direction – it’s more likely to be down with the broader market. But it’s at times like this that you want the hand-holding from an expert who can provide some context and turn around and say to you, “Look, this is the environment. This is what’s happening.”

Basically, you want a safe pilot at the front of your plane.

Check out this week’s episode of Stock of the Week to see all my metrics and charts on ABM Industries.