These three growth stocks all have the potential to outperform the market.
With the S&P 500 index recently passing an all-time high, investors are entitled to feel happy about investing in equities. Still, those who are interested in outperforming the index will look for stocks with growth prospects over the broader economy. That’s where stocks like industrial software company PTC (PTC 1.37%), positioning and workflow technology company Trimble (TRMB 0.32%), and aerospace supplier Carpenter Technology (NYSE: CRS) come in.
Digitizing the future with PTC
PTC’s closed-loop system (a collection of software solutions) offers its industrial customers a way to design, develop, manufacture, service, and ultimately dispose of a product in a process that involves constantly feeding data back into the loop to improve the process. This is all possible using digital web-enabled technology (such as digital twins and the Internet of Things) to gather and analyze data.
Design engineers using PTC’s computer-aided design (CAD) software may be asked to modify a product’s design based on indications from PTC’s product lifecycle management (PLM) software, suggesting that it could be manufactured more effectively. The same argument applies to servicing a product using PTC’s service lifecycle management (SLM) software.
It’s a closed-loop cycle of constant interaction and continuous improvement, which can reduce a product’s time to market, improve productivity and quality management, and allow the company to respond better to changes in its market.
These benefits encourage customers to adopt its solutions even if the customers’ end markets are lackluster. As such, PTC continues to grow its annual run rate (ARR) of active subscription software, cloud, and software-as-a-service (SaaS) contracts at a low-double-digit pace.
Given a more robust economy, PTC’s ARR growth rate is likely to improve, but even with low-double-digit growth, the company is set up for solid growth as the recurring revenue translates into cash flow.
Trimble is well positioned for success
Due to its positioning and workflow technology, Trimble stock is held in a couple of Cathie Wood’s Ark Invest exchange-traded funds (ETFs). That decision probably comes from its disruptive technology that helps clients in construction and infrastructure, transportation, geospatial/mapping, and agriculture (through a joint venture with AGCO).
While it’s historically been known for its highly precise satellite-based positioning technology, Trimble’s future lies in marrying its hardware with its increasing sales of software and services. The latter allows customers to continuously gather data to monitor, control, and analyze workflows precisely.
Using Trimble’s solutions, a building or infrastructure project’s design, construction, and operation can be precisely monitored through one software solution. As such, construction managers can obtain high visibility into the progress of a project. For example, they can monitor when and how structural elements are put in place in a project. This activity may sound mundane, but large-scale construction and infrastructure projects are extremely complex and notorious for cost overruns and wastage.
Trimble’s solutions help optimize workflows. Just as with PTC, Trimble’s end markets aren’t in great shape now, but its solutions continue to generate low-double-digit growth in recurring revenue. It’s set to generate substantial amounts of cash flow in the coming years as the underlying strength in its business shines through.
Carpenter Technology: The best way to play the aerospace recovery
It’s no secret that the commercial aerospace market is in recovery mode, but it’s not so easy to find the best way to invest in it. In the large-cap space, RTX has had issues with the need to carry out engine inspections on its geared turbofan, and Boeing‘s quality control issues are well documented. Meanwhile, the valuation on the “go-to” large-cap stock in the sector, GE Aerospace, is looking close to fair value.
Then there’s Carpenter Technology, a manufacturer of specialty alloy and titanium parts and components. Its key end market is aerospace, and the company is enjoying a sustained recovery in sales. Management recently pulled forward its aim of hitting $460 million to $500 million in adjusted operating profit by one year, to 2026.
The company tends to have relatively high fixed costs, which means its margins collapse when revenue falls sharply; however, the reverse is true in the upswing. As such, its profits are increasing sharply, from an adjusted operating income of $133 million in 2023 to an estimated $339 million to $343 million in 2024 and, as noted earlier, $460 million to $500 million in 2026.
Image source: Getty Images.
Moreover, increasing trade sanctions worldwide are putting a premium on U.S. suppliers, and Carpenter looks well positioned to benefit for years. Trading at less than 20 times its estimated fiscal 2025 earnings, Carpenter remains an excellent growth stock.