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Summary

  • Small cap stocks are often overlooked by investors when markets are at all-time or multi-year highs.
  • I believe that there are still undervalued/fairly priced small caps available that will make nice long-term investments.
  • Out of this group of Building Materials stocks, I believe that AAON is easily the best choice currently for long-term investors.

Overview

In April/May I wrote a series of articles that ranked the Dividend Champions based on a variety of metrics. Part 1 of that article can be found here. In this series of articles, I will be ranking stocks of the S&P SmallCap 600 index. Part 1 can be found here. I will be using the following 10 metrics to gauge each stock by:

  • Revenue Growth (past ten years)
  • Earnings Growth (past ten years)
  • Price Returns (past ten years)
  • Return on Assets (trailing twelve months)
  • Return on Equity (trailing twelve months)
  • Return on Invested Capital (trailing twelve months)
  • Price to Free Cash Flow (trailing twelve months)
  • Debt to Equity Ratio (annual)
  • P/E ratio (trailing)
  • P/E ratio (forward)

The scoring system is simple. If there are 8 stocks in the industry being reviewed, then each metric will have a score between 1-8, with the best performing stock receiving an 8 and the worst performing stock receiving a 1.

For Part 2, I will be taking a look at the Building Materials industry within the Basic Materials sector. Seven stocks will be reviewed, so each metric will have available scores of 1 through 7.

Because of the higher number of stocks being looked at throughout this series, I will be relying on data provided by ycharts.

The seven stocks are:

  • AAON (NASDAQ:AAON)
  • Apogee Enterprises (NASDAQ:APOG)
  • Griffon (NYSE:GFF)
  • Headwaters (NYSE:HW)
  • Quanex Building Products (NYSE:NX)
  • Texas Industries (NYSE:TXI)
  • Universal Forest Products (NASDAQ:UFPI)

AAON

ValueScore
Revenue Growth (past ten years)107.60%7
Earnings Growth (past ten years)309.20%6
Price Returns (past ten years)436.60%7
Return on Assets (trailing twelve months)18.62%7
Return on Equity (trailing twelve months)25.28%7
Return on Invested Capital (trailing twelve months)25.28%7
Price to Free Cash Flow (trailing twelve months)28.07x7
Debt to Equity Ratio (annual)0.00x7
PE Ratio (trailing)29.81x6
PE Ratio (forward)33.86x5

Looking at the table above, you can see that AAON is easily the best performing stock out of this group, scoring a combined total of 66. It received the highest score in 7 of the 10 metrics, and the second highest score in 2 more. The only downside to AAON is that it appears to be slightly overvalued, but when compared to the other stocks in this industry sector, that really isn't much of an issue.

Apogee Enterprises

ValueScore
Revenue Growth (past ten years)34.19%3
Earnings Growth (past ten years)757.40%7
Price Returns (past ten years)198.20%5
Return on Assets (trailing twelve months)5.31%6
Return on Equity (trailing twelve months)8.19%5
Return on Invested Capital (trailing twelve months)7.68%6
Price to Free Cash Flow (trailing twelve months)83.96x1
Debt to Equity Ratio (annual)0.06x5
PE Ratio (trailing)33.24x5
PE Ratio (forward)21.82x6

Looking at the table above, you can see that Apogee Enterprises scored a total of 49. The company has seen strong earnings and price returns, but relatively weak revenue growth. It also has the worst price to free cash flow value of any stock in this group.

Griffon

ValueScore
Revenue Growth (past ten years)38.46%4
Earnings Growth (past ten years)-123%1
Price Returns (past ten years)-46.80%1
Return on Assets (trailing twelve months)-1.05%1
Return on Equity (trailing twelve months)-3.02%1
Return on Invested Capital (trailing twelve months)-1.39%1
Price to Free Cash Flow (trailing twelve months)28.81x6
Debt to Equity Ratio (annual)1.06x2
PE Ratio (trailing)110.24x3
PE Ratio (forward)40.30x3

Looking at the table above, you can see that Griffon scored a combined total of 23. The company has seen positive revenue growth, but has negative earnings/price growth along with negative returns on assets, equity, and invested capital.

Headwaters

ValueScore
Revenue Growth (past ten years)58.98%6
Earnings Growth (past ten years)-92.80%3
Price Returns (past ten years)-42.40%2
Return on Assets (trailing twelve months)1.24%3
Return on Equity (trailing twelve months)12.60%6
Return on Invested Capital (trailing twelve months)1.58%3
Price to Free Cash Flow (trailing twelve months)30.49x4
Debt to Equity Ratio (annual)5.41x1
PE Ratio (trailing)112.72x2
PE Ratio (forward)39.43x4

Looking at the table above, you can see that Headwaters scored a combined total of 34. The company has seen decent revenue growth along with decent returns on assets and equity, but the company has seen significant drops in both earnings and stock price. Headwaters also has the worst debt to equity ratio out of this group of stocks.

Quanex Building Products

ValueScore
Revenue Growth (past ten years)-27.50%1
Earnings Growth (past ten years)-76.70%4
Price Returns (past ten years)34.60%3
Return on Assets (trailing twelve months)3.58%4
Return on Equity (trailing twelve months)4.80%3
Return on Invested Capital (trailing twelve months)4.76%4
Price to Free Cash Flow (trailing twelve months)30.37x5
Debt to Equity Ratio (annual)0.002x6
PE Ratio (trailing)34.21x4
PE Ratio (forward)57.10x2

Looking at the table above, you can see that Quanex Building Products scored a combined total of 36. The company has very little debt and has a pretty good cash position, but the company has seen significant drops in earnings and revenue over the past ten years.

Texas Industries

ValueScore
Revenue Growth (past ten years)43.83%5
Earnings Growth (past ten years)-95.30%2
Price Returns (past ten years)218.00%6
Return on Assets (trailing twelve months)0.32%2
Return on Equity (trailing twelve months)0.70%2
Return on Invested Capital (trailing twelve months)0.37%2
Price to Free Cash Flow (trailing twelve months)51.68x2
Debt to Equity Ratio (annual)0.87x3
PE Ratio (trailing)506.18x1
PE Ratio (forward)5,914x1

Looking at the table above, you can see that Texas Industries scored a combined total of 26. The company has seen fairly impressive revenue and stock price growth, but the company has struggled in terms of earnings growth and returns on assets and equity.

Universal Forest Products

ValueScore
Revenue Growth (past ten years)12.32%2
Earnings Growth (past ten years)-7.32%5
Price Returns (past ten years)64.18%4
Return on Assets (trailing twelve months)4.69%5
Return on Equity (trailing twelve months)7.15%4
Return on Invested Capital (trailing twelve months)5.88%5
Price to Free Cash Flow (trailing twelve months)43.33x3
Debt to Equity Ratio (annual)0.13x4
PE Ratio (trailing)21.36x7
PE Ratio (forward)15.23x7

Looking at the table above, you can see that Universal Forest Products scored a combined total of 46. The company is fairly priced and has attractive returns on assets and equity; however, the company has seen low revenue growth and negative earnings growth over the past ten years.

Conclusion

AAON, Inc. scored a total of 66 points, which is 17 points higher than the next closest stock. AAON displayed the best revenue growth, price returns, returns on assets, returns on equity, return on invested capital, price to free cash flow value, and debt to equity ratio out of this group of stocks.

AAON provides a low yielding (0.80% currently) dividend, but it is a dividend that has grown nearly 70% over the past ten years. Last year, in addition to the company's 3 for 2 stock split, AAON raised its $0.06 semi-annual dividend 25% to $0.10. Earlier this year, it was raised to $0.13.

The company continues to perform impressively. In its latest quarterly report, net sales were up 14.3% compared to the same period last year. Gross profit also increased from 22.9% to 28.6%. Net income increased by 37.6%.

There is no evidence that I can find that AAON's success will not continue well into the future. The company has a strong history of solid financial performance and a good management team. I believe the company's strong product portfolio and backlog will provide significant returns to long-term investors. As always, I suggest individual investors perform their own research before making any investment decisions.

Source: Outstanding Small Caps, Part 2: Building Materials