The news in 2022 has been dominated by the Russian invasion of Ukraine, inflation, and the Fed’s rate hike plans. These factors have dampened investors’ appetites for stocks.
The broader market is firmly in correction territory, while many stocks and sectors are in outright bear market territory, with the best example being high-growth, tech stocks. For example, the ARK Innovation ETF (ARKK) is down 43% YTD and off by 59% from its 52-week high in February 2021.
Given this backdrop, investors need to be even more vigilant in terms of buying high-quality stocks with improving fundamentals at attractive valuations. That’s why today I want to talk about Huttig Building Products (HBP) which fits all of these criteria.
Company Background
HBP is a micro-cap stock with a valuation of $250 million. It was founded in 1865 and is headquartered in St. Louis, Missouri.
The company is a building supplier for new residential construction, home improvement, remodeling, and repair work in the United States. The company offers various millwork products, including exterior and interior doors, pre-hung and factory finished door units, windows, patio doors, moldings, frames, stair parts, and columns under the Therma-Tru, Masonite, Woodgrain, HB&G, Simpson Door, Final Frame, BrasPine, Arauco, Windsor Windows, and Rogue Valley Door brands.
Given its business, HBP has been a major beneficiary of the housing boom that was triggered by the pandemic. It’s also able to capitalize on the strength in inflation since it’s able to pass on rising costs to its customers. Therefore, HBP is a rare company that is seeing growth in earnings, revenue, and margins.
Housing’s Bull Market Remains Strong
Of course, the most important factor in determining whether these positive trends continue for HBP is assessing the health of the housing market. Despite recent price appreciation, there’s no reason to expect that the housing bull market is anywhere close to being over.
The major factor is that inventories remain low. This is due to years of underbuilding following the housing boom and the Great Recession when homebuilders focused on cost-cutting and returning cash to shareholders rather than investing in growth.
Low inventories are one source of strength for the housing market and are resulting in bidding wars and prices trending higher despite the recent increase in mortgage rates. Further, there’s no reason to expect demand is going to slow given that we have a demographic bulge as Millennials enter their 30s and 40s. Household formation rates have also perked up, while household balance sheets are in good shape, indicating more capacity to take on debt. Both are leading indicators that demand remains strong.
Strong Fundamentals
Strength in housing is reflected in HBP’s recent performance. It reported record revenues and earnings in Q4 and 2021. For the full year, revenues were up 18%, net income went from a slight loss in 2020 to $49 million in 2021, and gross margins expanded from 20.1% to 22.1%. This is especially notable in an inflationary environment when most companies are seeing margins expand.
Despite this impressive performance, HBP remains quite cheap with a P/E of 5. Even more impressive is that HBP generated about $60 million in cash during the year which equates to just under 25% of its valuation. Such a low valuation can be justified if housing has a downturn, however, this seems unlikely given the bullish supply and demand dynamics.
POWR Ratings
Given this combination of growth and value, it’s not surprising that HBP is rated an A which translates to a Strong Buy. A-rated stocks have posted an average annual performance of 31.1%.
The POWR Ratings also evaluates stocks by various components to give additional insight to investors. HBP has strong grades across the boards including an A for Growth and Value and a B for Momentum. Click here to see more of HBP’s POWR Ratings including grades for Stability and Sentiment.
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About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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