Olin is Our Growth Stock of the Week
Olin (OLN) is one of the top stocks in the market due to its attractive valuation and strong growth prospects. Read on to find out why investors should consider adding it to their portfolios.
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The stock market has encountered its biggest bout of volatility since the early months of 2020, when the coronavirus started invading our collective psyches. This time, the issues and challenges are much different.
The Russia-Ukraine war has entered its third month, and is the largest war in Europe since World War 2. This is putting upwards pressure on all sorts of commodities, especially on food and energy.
Adding to these woes are increasing concerns that the economy is slipping into a recession, especially with preliminary Q1 GDP readings showing a 1.4% contraction in the economy. Another unknown is that large parts of China’s economy are shut down or impaired due to an outbreak of the omicron variant.
It’s certainly more challenging for investors to make decisions under these circumstances. One strategy is to identify companies with strong business momentum, attractive valuations, and catalysts for further growth. Recent market volatility has created the opportunity to buy such stocks at incredible discounts.
Our growth stock of the week, Olin (OLN), is a stock that has these characteristics. Read on to find out why its outlook is so appealing…
OLN manufactures and distributes chemical products in the United States, Europe, and globally. It operates in three segments: Chlor Alkali Products and Vinyls; Epoxy; and Winchester. The company sells products through distributors and directly. Its customers include various industrial companies, mass merchants, retailers, wholesalers, other distributors, and the United States Government and its prime contractors.
OLN is a great selection for the current environment because it has pricing power which provides protection against inflation. Additionally, demand for its products is unlikely to see a dropoff in a recession scenario, unlike other categories which are more vulnerable.
OLN’s stock has dropped by about 16% since peaking in November of last year. Yet, the company has demonstrated incredible momentum over this period. This has led to very attractive valuations and the possibility for jaw-dropping returns if the company can outperform relative to expectations.
In fact, this is exactly what happened with the company’s latest earnings report which sent shares higher by 10%. The company topped analysts’ estimates on the top and bottom line and showed EPS growth of 62% and revenue growth of 28%.
It also increased its full-year guidance for EBITDA to $2.9 billion from $2.6 billion. This is especially impressive considering that its total market cap is $8 billion. Clearly, there is no evidence of a slowdown in the economy as of the first quarter.
However, investors have clearly priced in a slowdown as evidenced by its forward P/E of 6.3. Another part of its earnings report that value investors will appreciate is that the company bought back $263 million in stock during the quarter which is about 3% of the float. It also pays a 1.4% dividend which has increased every year since 2005.
The main catalyst for OLN is inflation. OLN’s chemicals are essential for all sorts of industrial, biomedical, and manufacturing processes which gives it pricing power especially as these chemicals are a small portion of overall costs. In essence, it means that OLN’s customers are unlikely to balk at higher prices.
Another catalyst for OLN is that it unveiled a joint venture with Plug Power (PLUG) to produce and market green hydrogen. This gives OLN exposure to the alternative energy industry which has major upside given the rising price of oil & gas, the need to reduce reliance on Russian energy, and longer-term concerns about greenhouse gas emissions.
According to Evercore, “As hydrogen production is a by-product of chlor alkali production, this will allow Olin to recognize the full potential of its untapped hydrogen supply while Plug develops a new reliable hydrogen supply channel that complements its own efforts to build a green hydrogen production network.”
The POWR Ratings are also bullish on OLN as it’s rated a B which translates to a Buy. B-rated stocks have posted an average annual performance of 21.1% which compares favorably to the S&P 500’s annual 8.0% gain.
In terms of component grades, OLN has a B for Growth due to the catalysts mentioned above and the relative strength of the industries that its customers come from. Additionally, OLN is part of the Chemicals Industry which is rated an A. Click here to see more of OLN’s POWR Ratings.
What To Do Next?
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OLN shares rose $0.56 (+0.94%) in premarket trading Wednesday. Year-to-date, OLN has gained 5.23%, versus a -16.38% rise in the benchmark S&P 500 index during the same period.
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.