It’s Tuesday, so I usually write about Barchart’s Top and Bottom 100 Stocks to Buy. However, I need to experiment, so I’m trying a different approach.
I’ve mentioned it several times over the past year, but my wife runs a small construction company in Halifax where I live. As a result, I often notice many of the products her teams use on their various projects. Go into a Home Depot, and you could spend an entire day finding potential stocks to buy.
Before she entered construction in 2020, she was a multi-store manager for several well-known retailers for over 20 years. That’s how I got educated and informed about retail stocks. Hanging around and noticing things.
The construction industry has been in the spotlight because of the shortage of tradespeople needed to build more housing. This has made life tough for everyone.
I've screened the construction sector for companies that have outperformed the S&P 500 by at least 10 percentage points over the past year and have a return on assets of 10% or higher.
Thirteen names are listed, but only one has doubled the index or better—United States Lime & Minerals (USLM), up 147.15% relative to the index. The top five are listed below.
I recommended Comfort Systems USA (FIX) in November. They’re all decent businesses.
However, for this article, I will focus on USLM stock. Despite a big run over the past 52 weeks, it still looks reasonably priced. Here’s why.
What Does United States Lime & Minerals Do?
As the company name suggests, it manufactures lime and limestone products that it sells to several industries, most notably construction businesses, industrial, metals, environmental, roof shingle manufacturers, oil and gas services, and agriculture industries.
It produces limestone from four open-pit quarries in Texas, Arkansas (2), and Oklahoma. It also produces limestone from underground mines in Oklahoma and Missouri. Over the past three years, it has mined an average of 3.78 million tons annually from its various properties.
Over the past three years, those properties generated nearly $707 million in total revenue and $157 million in net income, a 22% net margin. That explains the healthy 20.7% return on assets listed in the introduction.
Selling products such as lime slurry isn’t a sexy business. However, its performance over the last 12 months is hard to knock. It beat the index by 147 percentage points, and over the past five years, it outperformed the index sevenfold.
Its Valuation Seems Reasonable
According to S&P Global Market Intelligence, its enterprise value is $3.19 billion, 10.5x its trailing 12-month revenue of $303.4 million and 22.8x its EBITDA of $137 million. This margin is 45.2%, more than 1000 basis points higher than Apple’s (AAPL). Yet Apple’s EV/EBITDA is 23.2x.
While USLM stock is up 180% over the past 52 weeks, it’s down from its 52-week and all-time high of $159.53 reached in late November.
Year-to-date, it has earned $81.8 million in net income on $237.7 million in revenue. Based on 2023 revenue of $281.3 million, $74.5 million in net income, 10.2% sales growth, and 42.2% net income growth through Q3 2024, it should finish 2024 with sales of $310.0 million and $116.3 million in net income.
That’s $4.05 a share. Based on its current share price of $123.11, it trades at 30.4x this estimate. It might appear a tad high, but given its profitability and growth, it’s definitely a nosebleed valuation because the need for its products isn’t going away.
Use Options to Play This
It won’t be easy, given that the 30-day average is just 18 contracts, and the 30-day average share volume is 108,931, which is also relatively low.
In recent months, I’ve been developing an options strategy to capture better entry points on corrections, disciplined selling on significant moves higher, and income generation as a by-product of the two.
It helps if you have more than a drip for options volume, but it is what it is.
I’m looking for a put strike price of around $97.50 (20% lower than the current share price) and a call strike price of around $180 (50% higher).
The May 16 (122 days to expiration) $95 put strike has open interest of just 2. The bid on it is $1.55 with the last trade at $2.50. The $180 call for the same expiration in May has no open interest, but the $200 strike has 4. There’s no bid price, but the mid-price is $1.35, so I’ll use that.
Selling both the call and the put would generate an annualized return of 7.0% [$1.55 put premium and $1.35 call premium/$124.06 share price x 365/122 DTE].
Now, given the low volume, I’m not saying you’ll be able to pull this off. Still, suppose you buy 100 shares of USLM at current prices and are able to sell one call and one put. In that case, you’ve provided yourself with the potential to buy more at a lower price, should it correct, while also implementing a forced exit with 60% appreciation to show for it while generating a small amount of income.
I like the sound of that.
