1 Magnificent Dividend Stock Down 74% to Buy Now and Hold Forever

Manufacturers of flexible metal hoses aren’t exactly the kind of business that comes to mind when you think of stocks with market-shattering potential. However, as a leader in this flexible metal hose niche — primarily Corrugated Stainless Steel Tubing (CSST) — Omega Flex (NASDAQ: OFLX) proves that monstrous returns can come from all types of stocks.

From the company’s initial public offering (IPO) in 2005 through 2021, Omega Flex has produced total returns of more than six times that of the company. S&P 500 index. Even after Omega Flex has seen its stock price drop 74% over the past few years, largely due to the cyclical nature of its operations and its industry, the company’s returns have roughly matched those of the S&P 500 since Omega’s IPO Flex.

As alarming as this selloff was, I can’t help but see it as a once-in-a-decade opportunity for investors with the patience to buy and hold for a decade at a time. Here’s what makes Omega Flex an attractive investment.

Omega Flex moves hand in hand with the US real estate market

Omega Flex’s CSST systems offer several advantages over traditional black iron piping for combustible gases in residential and commercial construction. Unlike black iron or copper pipe, which requires separate threads and fittings attached for each bend required during construction, Omega Flex flexible tubing can be bent by hand and installed in long, uninterrupted lines throughout the building.

In addition to this simplified installation process, Omega Flex’s CSST performs better than rigid conduit during earthquakes and lightning, making it more resistant to damage. Because of these advantages, CSST now accounts for approximately 50% of fuel gas piping in new and remodeled U.S. home construction — a niche in which Omageflex considers itself a leader.

Continuously iterating on the proprietary rotary manufacturing process it developed in 1995, the company’s manufacturing capabilities are as flexible as the CSST it sells, supplying goods based on demand.

While this leadership position in a growing niche is promising, the vast majority of Omega Flex’s sales correlate to the cyclical US housing industry.

With its sales moving hand-in-hand with US housing starts, Omega Flex has struggled mightily over the past two years. As U.S. housing starts continued to slow, as the market struggled with rising interest rates, the knock-on effects of high inflation and an overall uncertain consumer, Omega Flex sales fell in tandem.

The story continues

However, research from Zillow shows the U.S. housing market remains 4.5 million homes short, and consumers yearn for more affordable housing. In the long run, this should rejuvenate growth in US housing starts, but when that change will occur is uncertain.

Ultimately, however, with the Federal Reserve set to cut interest rates in September, the tide could begin to turn for Omega Flex in the shorter term. Best of all, for investors, the company can currently be purchased at what appears to be a once-in-a-decade valuation.

A once in a decade opportunity

Regardless of when the U.S. housing boom starts to turn around, investors buying Omega Flex can take solace in the fact that they’re getting a top-notch compound at a great price. Even with the company currently at the cusp of its business cycle, Omega Flex currently boasts a 24% return on invested capital (ROIC).

Measuring the company’s profitability relative to debt and equity, this resilient ROIC is indicative of a broad moat surrounding Omega Flex’s operations. Historically, companies that generate higher ROIC than their peers have been shown to deliver superior stock returns, as this article suggests. In addition to this high ROIC, the company maintained a net income margin of 18% despite the challenging macroeconomic environment.

From a valuation perspective, Omega Flex’s price-to-earnings (P/E) ratio of 25 is near 10-year lows, and its dividend yield of 2.8% is at an all-time high.

Despite these high dividend payouts amid the challenging operating environment, the company is only using 69% of net income to fund its payout. Having routinely distributed most of its earnings to shareholders in recent years — including a hefty special dividend in 2019 — management isn’t afraid to return cash to shareholders. With insiders owning 25% of the company’s stock, management is well motivated to keep growing those dividends — perhaps even at an accelerated pace once revenue growth returns.

Ultimately, Omega Flex isn’t the flashiest investment opportunity out there. However, the short-term and long-term trends are starting to tilt in Omega Flex’s favor. Given the company’s highly profitable (albeit cyclical) operations available at a once-in-a-decade valuation, I think it’s a magnificent dividend stock to buy and hold for decades.

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Josh Kohn-Lindquist has positions in Omega Flex and Zillow Group. The Motley Fool has positions in and recommends Zillow Group. The Motley Fool has a disclosure policy.

A Once-in-a-Decade Opportunity: 1 Magnificent Dividend Stock Down 74% to Buy Now and Hold Forever was originally published by The Motley Fool