Sometimes it pays to go off the beaten path. That's pretty much how investors in agriscience company Corteva (CTVA -0.33%), aerospace and defense services company AAR Corp (AIR -1.06%), and electrical producers manufacturer nVent Electric (NVT -0.83%) are thinking because their stocks have outperformed the S&P 500 index by 29%, 35%, and 43% over the last year. The good news is they are still a good value and offer investors plenty of growth potential. Here's why.
1. Corteva had multiple earnings drivers
The seed and crop protection company is set to rapidly expand its profit margins and profits in the coming years, and the good news is it has multiple levers to get there. Management plans to cut some $400 million in costs by 2025 amid refocusing its business on its core product lines and geographies. Meanwhile, the company is stepping up investment in research & development to continue developing new products, which usually carry higher margins.
In addition, Corteva is expanding sales of its systems developed under its own technology, meaning it can reduce the share of revenue paid in royalties to other companies. An example comes from its Enlist system, which already commands 45% of the U.S. soybean acreage, and management plans to get to 60% by 2025. The Enlist system is an example of a complementary seed and crop protection system (the seeds are resistant to the herbicide).
Corteva's aims are backed up by ongoing strength in farmers' cash income from crops, driven by relatively high crop prices.
It's an excellent mid and long-term story, and Corteva remains an attractive stock for investors looking for a stock that's not so dependent on economic growth.
2. An overlooked aerospace stock
The commercial aerospace and defense sectors are among the most exciting areas to invest in for 2023. Commercial aerospace continues to grow as it recovers from the devastation wrought by lockdowns and travel restrictions. At the same time, there's a renewed emphasis on defense spending in light of the conflict in Ukraine.
AAR Corp provides aviation services, including maintenance, repair, and operations services, parts supply, and component support to airlines and defense customers. The company's operating margin is now ahead of its pre-pandemic level, driven by surging sales in commercial aerospace (up 21% in the second quarter of 2023). It's all the more impressive considering that the company's defense revenue is recovering from the completion of contracts in Afghanistan.
Data by YCharts.
Aerospace companies like Raytheon, General Electric, and Honeywell continue to report double-digit growth in the commercial aerospace aftermarket and have excellent outlooks for 2023. As such, AAR Corp stands well placed for growth in the coming years.
3. nVent Electric
The connection and protection electrical products maker has a market cap of less than $8 billion and is a play on the "electrification of everything" investment theme. It doesn't always get the attention it deserves, but the 19% rise in the stock price this year suggests that's changing.
The company blew away Wall Street estimates in the fourth quarter, and after a year of 20% organic sales growth, management expects organic sales growth of 4% to 6% in 2023, with margin expansion leading to 4.5% to 8.8% growth in earnings per share.
The 2023 earnings growth rate might not seem like much, but it comes after a very strong 2022, and the midpoint of the 2023 earnings guidance implies 57% growth on 2021.
Moreover, the reason for such strong growth is a megatrend likely to remain strong even in a slowdown. nVent makes essential connection and protection systems used in electrical installations. So, suppose you invest in data centers, electric vehicle infrastructure, renewable energy, smart buildings, industrial automation, the Internet of Things, 5G networks, etc. In that case, you will need the kind of enclosures, fastening systems, and thermal management solutions nVent provides. As such, nVent's long-term growth is assured.
