With the market trading at record highs, it’s a challenge to find an undervalued quality stock. But we’ve found one — Resideo Technologies (REZI) — which we are adding to to our Mid-Cap Value Portfolio, notes Scott Chan, contributing editor of Investing Daily's The Complete Investor.
Spun off from Honeywell (HON) in 2018, Resideo offers various comfort, thermal, and security solutions mainly for residences, including thermostats, humidifiers, air filters, security cameras, and water leak detectors.
Resideo markets these under the Honeywell Home brand and pays Honeywell a royalty of 1.5% of net sales. It estimates its products are installed in more than 150 million homes around the globe, with the U.S. accounting for about 75% of sales and Europe, 20%.
The connected products fit into the internet of things (IOT) evolution in which homes are becoming smarter and more connected over time.
Under the most conservative projections, the smart-homes market is expected to grow by at least 10% per year through 2025. As a leader in this area, Resideo should enjoy demand tailwinds for years to come.
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A major reason for the stock’s low valuation is that post-spinoff financial results weren’t very impressive. Sales barely grew, and operating margins declined. Under new CEO Jay Geldmacher, who took over in May 2020, however, things seem headed in the right direction. He has stressed operational efficiency and cost control and brought in a new executive team.
Even after a big run over the past few months, the shares still trade at just 12 times projected 2021 earnings and 1.7 times book value. That compares to 20 and 2.4 for the benchmark S&P Midcap 400 Index.
If investors become more aware of the company’s new leadership, that could result in a higher valuation, giving the stock an extra boost.