Halloween is coming up fast, which means it's time to put jack-o'-lanterns on porches, inflatables on lawns, and tasty stocks in your portfolio.
Of course, it's always a good time to fill up your portfolio with the best stocks. But in keeping with the season, we asked three of our Motley Fool contributors what treats they'd recommend to investors this October. They came back with Hillenbrand (HI 1.52%), NV5 Global (NVEE 0.65%), and Axalta Coating Systems (AXTA -2.96%). Here's why.
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Don't avoid these caskets
John Bromels (Hillenbrand): If you see a casket in a haunted house, it's a pretty good bet that something's going to pop out of it to scare you. Stay away! For industrial conglomerate Hillenbrand, though, the casket is nothing to fear.
Hillenbrand operates a few different businesses, but it's primarily focused on plastics. It manufactures and sells equipment for processing and extruding plastics. The company recently acquired Milacron, a leader in plastics molding. As a result, sales have increased dramatically year over year in the company's most recent quarters, although organic sales were down 6% in its third quarter of FY 2020, due largely to the economic recession.
What saved the company from a sharper organic sales decline was... caskets! Hillenbrand owns casket and funeral urn manufacturer Batesville, which is one of the highest-margin businesses the company owns. It also tends to be a recession-resilient business for obvious reasons.
Hillenbrand went public in 2008 and has increased its dividend every year since. Currently, it's sporting a 2.7% yield, and its fortunes seem only likely to improve as the plastics market comes back online. Even after taking on debt to purchase Milacron, Hillenbrand's debt-to-equity ratio is still just 0.8, which seems manageable. This is one batch of caskets investors should take a closer look at this Halloween.
Nothing bloodcurdling about this bargain bin infrastructure stock
Scott Levine (NV5 Global): For those seeking a sweet deal to go along with all of those sugary treats this Halloween, NV5 Global is a stock that certainly warrants consideration. While some stocks have risen to frighteningly steep valuations recently, NV5 represents a real bargain, trading at 10.2 times operating cash flow -- an eye-popping discount to its five-year average multiple of 30.8.
An infrastructure-oriented company, NV5 provides engineering and consulting services to a variety of public and private clients around the world. Besides growing its top line at an impressive clip over the past few years, NV5 has also demonstrated noteworthy prowess at increasing profits -- two qualities that become increasingly evident when juxtaposed with two of its leading competitors: AECOM (ACM 0.12%) and Willdan Group (WLDN 0.52%).
NVEE Revenue (Annual) data by YCharts.
Over the past five years, NV5 and Willdan have both enjoyed significant revenue growth; however, NV5 distinguishes itself from Willdan in converting its sales into both profit and cash flow. And NV5's success becomes even more apparent when considering that AECOM has seen its operational cash flow ebb more than 4% during the same period that NV5 has grown it more than 568%. Similarly, AECOM's precipitous 372% drop in net income stands in stark contrast to the 180% growth in NV5's bottom line.
And it's not only the company's past success that should delight prospective shareholders. Looking at the company's backlog, investors will find there's plenty of reason to believe that NV5's future remains bright. While many companies have suffered from declines in orders due to customers adopting more conservative financial stances during the global pandemic, NV5 is finding the opposite; the company ended Q2 2020 with a backlog of $525 million, representing a 16% year-over-year increase.
Don't be scared of the auto market
Lee Samaha (Axalta Coating Systems): Investing in the automotive-focused sector may appear to be a trick, but it's much more of a treat right now for shareholders in Axalta. The stock is up more than 55% in the last six months, and the recent third-quarter earnings showed a company in recovery mode. It also doesn't hurt investor confidence that Warren Buffett's Berkshire Hathaway holds the stock.
Based on 2019 figures, the paint and coatings company generated 39% of its sales from the refinish market (largely automotive refinishing due to collisions) with a further 27% coming from light vehicle original equipment manufacturer (OEM) coatings, and 8% from commercial vehicle coatings.
End markets certainly haven't been great for Axalta in recent years, as falling automobile production doesn't help most companies in the industry. However, the case for buying Axalta stock now is based on two ideas. First, 2020 will mark a trough in both automotive refinishing and automotive OEM coating demand. As the economy improves, miles driven increase too, and inevitably, so will collisions. Meanwhile, automotive production is improving from the production shutdowns imposed earlier this year.
Second, Axalta's valuation already seems to be pricing in the worst. For example, the stock trades on 17 times expected 2021 earnings and 16 times expected free cash flow.
