We recently compiled a list of the 8 Best Conglomerate Stocks to Buy Now. In this article, we are going to take a look at where RCM Technologies, Inc. (NASDAQ:RCMT) stands against the other conglomerate stocks.
What are conglomerate stocks? These stocks are the ones that have their ownerships in diverse businesses, spanning different sectors like finance, energy, technology, healthcare, etc. To be precise, a conglomerate is a business model where many companies are collected into a single large corporation that is owned by the parent company.
A conglomerate can consist of many businesses in the same industry or from different industries to diversify business and navigate risks. Some conglomerates tend to own a series of companies that make up the entire labor and supply chain for a single end product.
In a conglomerate, a parent company has the controlling stakes of all the smaller and unrelated businesses that operate independently. At times, conglomeration gets enacted by holding companies specializing in M&As. These companies are formed specifically to acquire smaller companies and collect business interests.
Investing in Conglomerate Stocks
There are several benefits of investing in conglomerates, some of which include diversification into several sectors, stability in revenues, synergistic opportunities, and many more. Conglomerates tend to provide greater stability and resilience at the time of market fluctuations as compared to pure-play companies.
Conglomerates have internal capital markets. This means that if one business of the conglomerate performs poorly, its loss can be offset by the other businesses performing relatively better. These businesses benefit by establishing synergies as the costs of operating a series of businesses can be reduced via consolidation. Conglomerates are capable of moving significant sums of money from businesses having limited opportunities for incremental investment to other areas possessing greater potential. These businesses have the potential to scale far larger in size as compared to the businesses constrained by the limited potential of that particular industry in which they are present.
Therefore, venturing into different industries can result in synergistic benefits, which can lead to significant cost savings along with improved cost efficiency. When a series of businesses in a conglomerate combine their resources, the conglomerate CEO can negotiate better deals with suppliers and manage procurement costs. This will ultimately lead to the optimization of production processes. Conglomerates can leverage a diverse portfolio of businesses, leading to cross-selling and cross-promotion opportunities. Through the promotion of complementary products, conglomerates can drive revenue growth.
2024 has been quite volatile for the broader market as a result of sticky inflation, high interest rates, and recession fears. Investing in conglomerates might help investors steer through these uncertain times. S&P 500 Industrial Conglomerates Sub-Industry Index saw a return of over ~35% over the past year, while the broader index (Dow Jones Industrial Average) went up by ~12%.
While investing in conglomerates has benefited investors most of the time, some may find these investments challenging. There can be a loss of efficiency, including a divergence from the core businesses. Moreover, the resources that get divided over numerous businesses might not be synergistic. There can be a lack of transparency in conglomerates, impacting their brand name and market share.
For investors, it is of utmost importance to know the company’s true picture. Only then will an investor be able to generate strong and stable returns. Conglomerate CEOs can sometimes resort to dubious accounting methods to show inflated EPS numbers. Warren Buffett exposed this trend in a letter and explained how conglomerate CEOs, in the late 1960s, used to drive their conglomerate’s stock to 20 times earnings only to issue shares at a higher price and then deploy the proceeds to buy out other cheaper companies. At some point, a conglomerate becomes a collection of poor underlying businesses, with little or no growth prospects.
Later on, through the application of different accounting methods, they show increased per-share earnings. This process ultimately led to the redistribution of wealth, rather than the creation of wealth.
Wealth creation comes from investing in stable and sound businesses, having efficient accounting practices, and strong management. Therefore, investors should be wary of bad management and financial shenanigans while investing in conglomerate businesses.
That being said, if the conglomerate form is used effectively and transparently, it can act as an ideal structure for creating generational wealth.
Our Methodology:
We screened for conglomerate stocks on the Finviz stock screener. We compiled an initial list of 15 large conglomerates by market cap and checked their average price targets. We then selected and ranked the 8 stocks that analysts saw the most upside to, as of 6th August 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A diverse team of professionals working together to deliver sophisticated engineering solutions.
RCM Technologies, Inc. (NASDAQ:RCMT)
Average Upside Potential: 77.21%
RCM Technologies, Inc. (NASDAQ:RCMT) is the provider of business and technology solutions which are designed to enhance and maximize operational performance of its customers.
The company posted strong top-line growth, maintaining its legacy. Top line went up by 7.2% YoY to $71.9 million for 1Q 2024. This growth stemmed from strong performances throughout its segments, mainly in engineering, where gross profit increased 27.1%. This strong growth in the engineering segment exhibits effective project execution and higher-margin contracts. Collectively, these developments led to overall revenue expansion.
Coming to profitability, the company’s adjusted EBITDA increased 11.1% annually to $6.8 million in 1Q 2024, with adjusted diluted EPS increasing 30.4% to $0.53 per share. These were supported by its sharp cost controls which might lead to sustained growth momentum. RCM Technologies, Inc. (NASDAQ:RCMT) is focused on expanding its market footprint, mainly in the K–12 education sector. It saw 19.1% revenue growth in school districts served, exhibiting successful onboarding of new clients.
Analysts at Benchmark initiated a coverage on the shares of RCM Technologies, Inc. (NASDAQ:RCMT) and gave a “Buy” rating. They gave a price objective of $33.00 in a research report dated 15th May.
It seems that the stock of RCM Technologies, Inc. (NASDAQ:RCMT) is currently undervalued as it trades at ~12.80x of NTM earnings, which is at a deep discount to the sectoral average of ~18.9x. The company is likely to benefit from its cash conversion, that increased both sequentially and YoY in 1Q 2024. It should continue to see improvement in cash flow from operations in each of the upcoming 2 quarters.
In the first quarter of 2024, RCM Technologies, Inc. (NASDAQ:RCMT) was included in the portfolios of 11 hedge funds, with a total stake value of ~$19.9 million.
Overall RCMT ranks 5th on our list of the best conglomerate stocks to buy. You can visit 8 Best Conglomerate Stocks to Buy Now to see the other conglomerate stocks that are on hedge funds’ radar. While we acknowledge the potential of RCMT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RCMT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.