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FA Alpha Daily:
Tuesday Company Specific
Powered by Valens Research
After a couple of years of uncertainty in the market, we enter 2022 more bullish than we have in a long time—and it’s for one simple reason.
The Fed’s rate hikes play a crucial role in conveying a message to the public. Their message to investors is both a signal that inflation is being tackled and the US economy is recovering.
With signs of stabilization under way, and a labor market that is the healthiest it has been in decades, the Fed realizes it doesn’t have to be as aggressive in propping up the US economy.
As the Federal Reserve once again begins to shift their focus, corporations are also starting to invest in a tangible way towards high future growth. Burgeoning demand as we exit the pandemic has led companies to look to ramp up their production capacity thanks to the tangible shifts we have seen in spending patterns.
With a desire to increase production capacity comes more demand for construction and engineering. However, the construction demand won’t be linked to just big new infrastructure.
Rather, companies will be focusing on investing in assets they’ve underinvested in for the past decade in hopes of modernizing their facilities.
As companies look to upgrade their facilities, this is where the newest addition to the FA Alpha 50 comes into play.
Founded in 1997 as Integrated Electrical Services, IES Holdings (IESC) started in Houston, Texas with the goal of providing electrical and mechanical services.
Over the past 25 years, the firm has continued to expand its business of electrical installation in residential, infrastructure solutions, and commercial applications.
With expertise across the US, along with 99 locations distributed among their four major business segments, they provide their services to a wide array of end users.
Today, IES Holdings uses its expertise to design and install integrated electrical and technology systems and to provide infrastructure products and services to various end markets.
Thanks to its history of expertise with major national corporations and strategic local companies, it has established itself to be a profitable company that doesn’t seem to be going anywhere anytime soon.
And with more companies than ever looking to invest in wiring their buildings, joining the Internet of Things, and expanding and refreshing their capacity, IES holdings is in for a lot of upside.
However, the market doesn’t seem to quite recognize how strong the company is. The market is currently forecasting IES Holdings, which has shown impressive resiliency for a century and a half, to see return on assets (“ROA”) stay the same even with strong asset growth.
As-reported markets lead us to believe that IES Holdings, Inc is just barely getting by with an ROA of 8% in 2021.
However, Uniform Accounting tells a different story.
By using Uniform ROA, we see that IES Holdings, Inc. consistently generates impressive returns, sitting above 16% for the past three years and even reaching 27% in 2021.
As competition has increased, IES Holdings has evolved and stepped up their offerings as well, and that is reflected in its robust profitability.
Over the years, IES Holdings has also positioned itself well to fuel growth, and in the past five years, it has consistently grown by more than 5%.
Yet even with such impressive metrics, the market still can’t comprehend how good of a company IES Holdings is, which is why it has a Uniform P/E that is well below corporate averages at 12x.
That is what makes IES Holdings such a compelling FA Alpha name. Its high returns, ability to grow, and low market expectations position it for significant upside.
This high-quality market leader in its industry is inexpensively priced and growing aggressively, which is why our FA Alpha Screen discovered the name.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, IES Holdings, Inc. is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, get access to FA Alpha 50.