The labor market continues to be strong with no sign of cooling, especially for low skilled or blue-collar workers. How do I know this? From recent earnings reports and subsequent earnings conference calls by Universal Technical Institute (NYSE: UTI), Lincoln Education (NASDAQ: LINC) and HireQuest (NASDAQ: HQI).
Lincoln Education and Universal Technical Institute are counter-cyclical investments, meaning they do well when times are tough. They are technical schools that benefit from higher unemployment as people tend to go back to school to gain skills that they can translate into well-paying jobs. I have written about UTI and LINC before as solutions to the skilled labor shortage in the US.
There were worries in June and July that the economy was slowing down and that it would impact the labor market, which would benefit technical schools like UTI and LINC. Instead, the opposite has happened so far. Both stocks were trading up for the year before their Q2 earnings reports. They are not anymore.
Both companies reduced forward guidance for student starts and UTI highlighted a big drop in adult student starts (as opposed to high school students). The only reason that adults stop entering technical schools is if there are plenty of high-paying jobs elsewhere.
And that’s where HireQuest comes in. HireQuest is a franchise staffing company focused on day laborers, factory workers and other blue collar temporary workers. I’ve written a deep dive report on the company and interviewed the CEO before. The company reported super strong earnings for the second quarter, announcing that sales and net income were up 63% and 75% year over year. The stock had been down almost 30% for the year but popped 11% on the news. On the conference call the CEO, Rick Hermanns, remarked that while he couldn’t predict the economy, he saw no change to demand and that they still couldn’t fulfill all the orders for temporary workers that companies needed.
And this is what official data from the government recently told us as well, companies keep hiring workers.
What am I doing with this information? I have sold my positions in LINC and UTI. It’s one thing to have an inexpensive valuation, but another to have flat growth with no clear drivers for demand. With no apparent end to the shortage of workers and pay rising rapidly, I’m not sure what changes the demand equation for these schools any time soon.
And that brings me to HireQuest, which is not only growing fast, but its fundamentals are fantastic. The company reported 63% EBITDA margins and an annualized 33% Return on Equity (ROE) without the use of debt. And the quarter they just reported isn’t even their strongest seasonal quarter, that is the third quarter. The company is currently on a run rate of $1.40 in annualized earnings on a $15 stock, meaning it trades at 10.7 times earnings.
I don’t know many unlevered companies with 30%+ ROEs that trade at such a low multiple. This might be why insiders stepped up and bought $500k worth of stock at the lows in May and June when there was non-fundamental selling. Due to the big jump in SPACs (Special Purpose Acquisition Corporations) that went public in 2021, the company was kicked out of the Russell 2000 index. That passive selling combined with an overall weak market led to the stock falling almost 40% from its highs.
After the big sell-off this year, there are many small and microcap stocks that are cheap, but very few that are cheap and yet at the same time growing fast and firing on all cylinders. It shouldn’t be long for other investors to catch on and HireQuest to start trading materially higher into year end.