Buying stocks that will benefit from the recent cut in the fed funds rate (as well as the additional cuts being forecast) makes sense. Moreover, looking at stocks of companies that have positioned themselves for growth in such a scenario is also a good idea. That's why Pentair(NYSE: PNR), United Airlines(NASDAQ: UAL), and ON Semiconductor(NASDAQ: ON) are highly attractive growth stocks to buy now. Let's take a closer look at these three stocks.
1. Pentair's growth prospects are long-term
There are two key reasons to buy water solutions company Pentair. The first is the company's potential to improve its pool products business due to lower interest rates. Relatively high interest rates have pressured the housing market and new pool construction. Pentair Executive Vice President Jerome Pedretti told Laguna Conference attendees in September that he believes there will be 60,000 new pools this year when "a more natural number would be in the 75,000 to 80,000" range.
Image source: Getty Images.
Still, lower interest rates should improve that number next year, and in any case, around 50% of Pentair's pool segment sales are in the aftermarket. As such, recovering new pool construction and the aftermarket servicing of an installed base of pools -- which includes the COVID-19-inspired boom in construction -- should lead to "mid-single-digit plus [sales growth] for the coming years and expand margin at the same time," according to Pedretti.
The second reason concerns its ongoing transformational initiatives to improve its return on sales from 20.8% in 2023 to 24% by 2026. The initiatives encompass more targeted pricing, reducing sourcing complexity, developing relationships with key suppliers, and implementing lean management techniques to reduce its operational footprint.
The cornerstone of the initiatives is the implementation of the so-called 80/20 Pareto principle, whereby a company tends to generate 80% of its sales from 20% of its customers. Focusing on the 20% brings about significant margin expansion (ask Illinois Tool Works investors for an example of its successful implementation).
Putting together the opportunity for good sales growth as the housing market recovers and margin expansion from the transformational initiatives in the coming years, plus long-term growth from aftermarket servicing of the installed base of pools, makes Pentair a very attractive stock for investors.
2. United Airlines stock can keep flying
The airline industry has long been criticized for its highly cyclical nature and the challenges equity investors face in making money. In a nutshell, the airline industry has historically struggled to generate profits to cover its cost of capital, and the real winners in the industry have been management, debt holders (who don't mind lending money as it's securitized against valuable assets --the planes), and aerospace suppliers.
Image source: Getty Images.
That may still be the case for the industry at large. For example, the International Air Transport Association (IATA) estimates the industry will generate a return on invested capital of 5.7% in 2024 compared to a weighted average cost of capital (WACC) of about 9.1%.
Still, some airlines are more equal than others. Of the $30.5 billion the IATA expects in industry net profit in 2024, $14.8 billion is forecast to come from North America alone. Furthermore, Wall Street expects Delta Air Lines to generate $3.8 billion in net profit and United Airlines to generate $3.1 billion in 2024.
Moreover, Delta and United's management recently argued that the industry acted rationally to reduce unprofitable capacity over the summer, and they are improving their revenue per available seat mile (RASM) as a consequence. This is a sign that, at least in North America, airlines aren't reverting to their traditional behavior of continuing to run less profitable routes in the event of overcapacity.
If that behavior lasts, then United Airlines stock is a steal, trading at just 5.7 times estimated 2024 earnings.
3. ON Semiconductor is a growth technology stock to buy
Focusing on building a business that serves the industrial and automotive end markets was not the best idea this year. However, long-term investors aren't buying ON Semiconductor as a vote on its end markets in 2024. They are more focused on its long-term profit prospects.
Image source: Getty Images.
There's no doubt that relatively high interest rates have curtailed auto sales in recent years, and the industrial sector has slowed in line with a slowing economy. That's held back investment in the auto (notably electric vehicles) and industrial sectors at large. That's bad news for ON Semiconductor's intelligent power and sensing solutions.
The impact is especially detrimental for shareholders, as the stock's investment potential relies on its ability to increase content sales per vehicle for electric vehicles (EVs) compared to internal combustion engines. Additionally, the stock is expected to achieve sales growth through its customers' investment in EV charging networks, renewable energy, advanced driver assistance systems, and factory automation.
ON Revenue (TTM) data by YCharts
Still, investment in these industries is likely taking a temporary pause and will return in a lower interest rate environment. Meanwhile, ON Semiconductor is preparing for it by investing for future growth, such as planning to spend up to $2 billion on an advanced power semiconductor manufacturing plant in central Europe. As such now looks like a great time to buy into a long-term growth story.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines, Illinois Tool Works, and ON Semiconductor. The Motley Fool has a disclosure policy.
