Under the Radar: Aaon May Grow in Rebound

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When the market's direction isn't clear, look for cheap stocks. That way, when growth returns, you will have more potential to gain. Here's a small-cap option with strong fundamentals that could benefit from a construction rebound.

Tulsa, Oklahoma-based Aaon(AAON) makes air-conditioning and heating products for the commercial and industrial markets. The company was founded as the John Zink Co. in 1928 and originally aimed to supply equipment for the oil industry.

Zink decided to diversify by producing heaters and air conditioners for Tulsa's wealthy elite. In 1968, the company started making equipment for businesses. McDonald's(MCD) became its first major customer in 1970, followed by Wal-Mart Stores(WMT) a year later. After a string of acquisitions and divestitures, the company spun off its HVAC unit, which became Aaon.

The company is in a unique position to take advantage of an economic recovery. Government stimulus projects and an improved housing market will likely fuel construction of new buildings and homes. They will need heat and central-air systems, helping Aaon boost revenue and earnings. We've rated Aaon "buy" for the past two years.

The company's first-quarter revenue fell 2% to $64 million, but net income climbed 5% to $7 million and earnings per share jumped 11% to 39 cents. Net margin climbed to 11%. Return on assets increased to 20% and return on equity rose to 28%.

Aaon's balance sheet houses $4 million of cash and no debt. A quick ratio of 1.16 indicates a strong liquidity position.