One Company Set to Thrive in Hurricane Season
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As summer heats up, so do our oceans. Warmer waters mean more stormy weather.
Just recently, the NOAA (National Oceanic and Atmospheric Administration) rang the alarm bells as their models forecast a very active hurricane season for 2024.
Their prediction is for 17 to 25 named storms, with anywhere from 8 to 13 of them becoming actual hurricanes…. yuck!
Anyone living in the Southeastern part of the U.S. knows how uncomfortable wind and rain can be.
BUT – these seasonal patterns are a part of life. Humans have dealt with hurricanes in the past… and they’ll deal with hurricanes in the future.
There’s a lot of planning that goes into storm preparation, including:
- Boarding the windows
- Having water and food rations available
- Generating power
- And using effective water drainage systems
This final area, water drainage, is our focus for today…
Because one company, Advanced Drainage Systems (WMS), has built a business around this growing need.
Today we’ll jump into three data-driven reasons why WMS is not only set to thrive in the near-term warmer months… but also in the years ahead.
And we’ll use three of my favorite TradeSmith tools that have a favorable outlook for the water mitigation company.
Alright, let’s dive in…
3 Easy Reasons to Own this Water Drainage Company
True to its name, Advanced Drainage Systems is in the business of designing and installing drainage systems in residential and commercial real estate.
When you own a home, drainage is a top priority. Adapting the landscape to handle heavier rains requires pipes, basins, and all sorts of modifications.
The goal is to keep the water flowing away from your home and back where it needs to go… rivers, streams, and ultimately into the ocean, where it came.
WMS helps customers do just this. And as you can imagine with warmer temperatures hitting the globe year after year, business has been booming.
The first way to understand this is by looking at the stock performance. On a five-year basis, WMS has demolished the S&P 500 with a 455% gain, vs. 89% for the index:
Few stocks can boast such a staggering feat. After you review these signals, you’ll likely see why this trend has further to go in the years ahead.
Reason No. 1: High Business Quality Score
At TradeSmith we do a lot of the hard work of sizing up individual companies and profiling the top brass.
A couple of basic tenets of a high-quality business are revenue growth and profitability. Since 2018, WMS has grown revenues from $1.38 billion to $2.87 billion in 2023.
That’s just over 100% revenue growth in five years. Not bad.
Even better is the net income picture (what’s left over after doing business). That’s surged from $72 million in 2018 to $510 million in 2023.
Clearly business has been good, reflecting the strong fundamentals and stock returns.
But at TradeSmith we’ve developed a metric called the Business Quality Score (BQS) that ranks every company from 0 to 100 based on four criteria:
- Profitability
- Growth
- Safety
- Payout
These four pillars assess the strength of the overall business, how much money falls to the bottom line, the historical volatility of the stock, and the debt-vs-equity-issuance picture.
Advanced Drainage Systems earns a 99, indicating this is a rock-solid asset:
Understanding a strong business is one thing. But having a true buy signal is another.
Reason No. 2: Strong seasonal tailwind
Seasons don’t only exist in weather — they also occur in the stock market. Some stocks get a boost in certain times of the year.
Using one of TradeSmith’s newest tools, Seasonality, we can see that from June 4 through Aug. 7, WMS sees a strong positive trend.
Since 2015, this two-month period historically results in 11.34% gains for WMS with a 77% accuracy rate:
That’s a green wave you don’t want to fight!
So, now we’ve got the narrative, fundamental, and seasonal pictures saying to own Advanced Drainage Systems. All that’s left is the go signal.
Reason No. 3: Rock-solid Quantum Score
The Quantum Score gives me an instant snapshot of both the overall health (fundamentals) and technical drivers for a stock.
When both of those hit the buy zone, it seals the deal for me. A ton of the heavy lifting of analyzing a company can be boiled down to one easy-to-understand number indicating the stock is set for gains ahead. And for WMS, that number is 72.4:
That’s right in the “sweet spot” of fundamentals and technical lining up to form a buy signal.
Over the long run, investing really is simple: Focus on great businesses with a tailwind for the future.
Advanced Drainage Systems has the growth profile, seasonality setup, and all-star ranking, making it a worthwhile bet.
As Jon Kabat-Zinn once said, “You can’t stop the waves, but you can learn to surf.” That is so true when it comes to all-star stocks.
The NOAA is predicting a stormy hurricane season. Go ahead and batten down the hatches. Get your storm gear ready.
But when it comes to the stock market, don’t just shelter in place.
Plenty of strong stocks are set to see big waves of capital. Be bold, and go surf them!
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily