New Trade for October 8th, 2020

Stocks are looking to add to yesterday’s gains this morning.  Yesterday, stocks climbed through the trading session with the S&P 500 finishing up 1.74%, the Nasdaq stacked on 1.88%, the Dow gained 1.91%, but the Russell 2000 led the way, ending the session with a healthy 2.14% rise.  

This morning we’ll explore an interesting small-cap company — small-cap being a reference to companies with market capitalizations under $2 billion — that has the potential to advance to mid-cap status and even reach the $10 billion market cap minimum that begins the designation for large-cap stocks. Plus, it’s a company that stands to benefit from the upcoming changes in Washington, no matter who wins the election.  

Federal Signal Corporation (FSS) owns a collection of niche businesses serving municipal and industrial customers.  Over 80% of its sales are granted by its environmental solutions group (ESG), which provides municipalities with a range of surface and sewer cleaning equipment, road digging and marking equipment, and industrial cleaning machinery.  

The rest of its revenue comes from its safety and security systems group (SSG), a collection of signals, sirens, and warning systems used by the police, municipalities, and industry.  It’s also a business that has experienced strong growth over the last decade, driven by acquisitions and supported by underlying demand for municipal spending on infrastructure.

Management believes a “combination of organic growth in excess of GDP and targeted acquisitions will lead to a high single digit revenue growth.  FSS, like many of its peers, is set for a COVID-19 earnings decline in 2020. But a forward P/E of ~18 makes it an attractive option for a company with growth opportunities within relatively stable markets.