A mini-correction in the markets often causes a pause for reflection. So, I thought I'd take a whistle-stop look at five companies that have all outperformed the S&P 500 index in 2023 and over the previous year, not least because they all have the potential to carry on doing so. Here's why.
1. nVent Electric
The electrical connection and protection company is something of a hidden gem. Run by an all-female CEO/CFO team, nVent's (NYSE: NVT) products are an indispensable part of the electrification of everything trend in the economy. Investments in electric vehicles and charging networks, smart buildings and infrastructure, data centers, renewable energy, 5G, and industrial automation all imply an increase in electrical installations, and that means an expanded market for nVent's electrical solutions.
The company has a super record of beating expectations and raising guidance. Investors have enjoyed a 174% return over the last three years as the company's end markets have expanded while management has taken full advantage. Trading on just over 16 times next year's estimated earnings, nVent remains a good value.
2. Baker Hughes
Fossil fuels may not be the flavor of the month as policymakers seek to promote renewable energy. However, for two reasons, Baker Hughes(NASDAQ: BKR) investors won't care too much about that.
First, despite ample skepticism around oil and talk of an impending recession, the fact is the price of oil is still around $79. Baker Hughes's management believes oil majors are being disciplined in their spending, having been burned after the end of the previous boom in the oil price burst in 2014. Meanwhile, leading oil producers Saudi Arabia and Russia have both repeatedly demonstrated a willingness to cut production to support the price of oil. The environment remains constructive, and Baker Hughes recently raised its full-year sales and earnings guidance.
Second, Baker Hughes is much more than oil field services and equipment. It's gaining traction in its fast-growing LNG and new energy orders, and management looks to generate further cost cuts on top of the $150 million planned as part of its restructuring program.
All told, the stock remains an excellent way to get some exposure to energy in your portfolio.
3. AAR Corp
With a market cap of just over $2 billion, AAR Corp(NYSE: AIR) isn't a household name. However, the customers it serves are very high-profile. AAR is a provider of aviation services (parts supply, maintenance, repair and engineering (MRO), and integrated solutions to some of the world's leading airlines (including United Airlines, Southwest, Delta Air Lines, and American Airlines), cargo airlines (including DHL and FedEx), and government customers including the U.S. Air Force and U.K. Ministry of Defense.
As such, it's an investment in the ongoing recovery in commercial air travel. In addition, the problems Boeing and Airbus have had with delivering airplanes in recent years mean airlines have extended their existing fleets, and older planes tend to need more servicing and parts.
Moreover, the acquisition of aircraft MRO and airline fleet management software company Trax adds high-margin recurring revenue to AAR's sales mix while opening up opportunities to cross-sell AAR's products and services to Trax's customer base. Wall Street analysts have AAR growing revenue at an 8.8% annual rate for the next couple of years, with margin expansion leading to a 16% annual increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) and good long-term growth prospects to follow.
4. ON Semiconductor
This company offers many things to different investors. For example, technology-focused investors are excited about ON Semiconductor's (NASDAQ: ON) silicon carbide technology. Industrial-focused investors are very interested in the company's focus on growing its intelligent power and sensing technology in key end markets like automotive (with a heavy focus on electric vehicles, or EVs) and industrial automation.
These end markets definitely make ON Semiconductor not the usual semiconductor conductor with heavy exposure to highly cyclical markets like consumer electronics.
The growth in EVs and industrial automation not only affords the company exciting secular growth markets but also offers an opportunity to expand revenue as these technologies use substantially more ON Semiconductor content.
Trading on less than 18 times earnings and with excellent long-term growth prospects, ON Semiconductor is an exciting stock to play some powerful secular growth trends.
5. Hexcel
Finally, advanced composite materials company Hexcel(NYSE: HXL) is an investment in the ongoing ramp in airplane production at Boeing and Airbus and the growing use of composite materials in airplane construction. The airplane manufacturers have multiyear backlogs in place and are aggressively ramping production as the commercial aerospace recovery continues and supply chain bottlenecks ease.
Meanwhile, there's little doubt that newer airplanes will increasingly contain more composite content, not least because Boeing's CEO believes they are an integral part of future airplane development.
As such, while Hexcel is hardly a cheap stock based on a valuation of 37 times this year's estimated earnings, it has high visibility into its future earnings thanks to the backlogs at Boeing and Airbus, and its long-term growth looks assured.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines, FedEx, Hexcel, ON Semiconductor, and Southwest Airlines. The Motley Fool has a disclosure policy.
