Very rarely does a bell sound at the bottom, or top, of an economic cycle. One of the most important of the economic cycles is the interest rate cycle. And, the market thinks it is hearing a bell in the distance with the release of the latest inflation numbers.
If inflation is falling fast enough to allow the Federal Reserve to lower rates in the first half of 2024, one of the biggest beneficiaries of that rate cut will be housing and housing related stocks. Thus the huge jump in those stocks the past few days. Two companies that will benefit from that rate move, but that aren’t trading at all time highs like some of the homebuilder stocks, are Alarm.com Holdings (ALRM) and Armstrong World Industries (AWI).
Alarm.com Holdings (ALRM) operates as both a technology provider and licensing company, partnering with security system installers and other home and commercial security systems. The company provides video surveillance backed by AI technology that can identify and differentiate between a number of characteristics of the subject captured on video. The Alarm.com system not only knows if the “movement” at your door is a neighbor's dog or a person, but can tell exactly who that person is, and not set off an alert if it’s just your spouse coming home with the groceries.
And if your first thought is that Alarm.com is a glorified Ring doorbell, not exactly. Alarm.com recently purchased an AI video analytics company, integrating both the technology, as well as the engineering and development team, into the ALRM company.
A perfect example of the ALRM technology in action is how it’s been used recently by hospitals. To avoid direct contact between hospital staff and patients during the pandemic, the Alarm.com system was used for two way communication. The system has robust security measures built into its software which meets very restrictive health care standards…as well as the needs of less stringent commercial businesses.
Alarm.com has an overall A rating in our POWR Ratings, where it ranks above 92% of the stocks we track in the Sentiment category, its strongest rating.
In its latest quarterly earnings report, ALRM revenue increased 2.6% YoY, but Saas revenue, which makes up around 75% of total revenue, grew at a brisk 8.9%. The company currently has gross margins of over 55%, and currently has over $680 million in cash and cash equivalents, something I very much like in the current high rate environment.
The stock is trading close to the bottom of a wide range it has occupied since late 2020. Assuming rates fall in 2024, and homeowners begin to unlock value stored up during this rate cycle, Alarm.com should benefit from home improvement funds, and could trade back toward the $90 level.
Another company which should be a huge beneficiary of falling interest rates in the new year, is Armstrong World Industries (AWI). AWI is a little more straightforward play on lower rates and continued new home building and remodeling.
The company designs and manufactures ceilings, suspension, and wall systems. As the housing shortage continues, even with mortgage rates hitting highs not seen in years, Armstrong products have continued to be in demand. The company just posted sales growth of 7% YoY, and an operating income up 36% from the prior year's quarter.
As CEO Vic Grizzle said in the earnings release, “With record-setting total company net sales and adjusted EBITDA this quarter, we continue to demonstrate the resilience of our business in the face of challenging market conditions.” If the company can perform this well with mortgage rates topping out, it should knock the cover off the ball if rates begin to fall.
And, as I mentioned above, unlike many of the housing stocks which are at or near all time highs, Armstrong’s stock has some ground to make up after pulling back to just over $80 now, having traded close to $120 in late 2021.
The stock currently trades at a PE of just 16, and even has a dividend yield of 1.4%. Operating margins are an impressive 17% and the company trades at only 2.5 times sales.
AWI carries a B rating in our POWR Ratings system, and ranks most highly on the Momentum and Quality components, where it has a score topping 98% and 93% respectively.
If the market is correct, and the rate top “bell” has been rung, we should see declining interest rates in 2024. Both Alarm.com and Armstrong have shown they can continue to perform in a high rate environment, and both stocks should move substantially higher if 2024 rings in a falling rate environment.
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ALRM shares were trading at $57.94 per share on Thursday afternoon, down $0.67 (-1.14%). Year-to-date, ALRM has gained 17.10%, versus a 18.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA.
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