3 hot growth stocks that are screaming buys in October

Buying the stocks that will benefit from the recent cut in the fed funds rate (as well as further cuts forecasted) makes sense. Moreover, it is a good idea to look at the stocks of companies that have positioned themselves for growth in such a scenario. That’s why Pentair (PNR 0.34%), United Airlines (Ul 6.47%)and ON Semiconductor (ON 1.72%) they are very 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 Pentair water solutions. The first is the company’s potential to improve its pool products business thanks to lower interest rates. Relatively high interest rates have put pressure on the real estate 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.

However, lower interest rates should improve that number next year, and in any case, about 50 percent of Pentair’s pool segment sales are in the aftermarket. As such, the recovery in new pool construction and aftermarket servicing of an installed pool base — which includes the construction boom inspired by COVID-19 — should lead to “single-digit plus (sales growth) for the next years. and expand the margin at the same time,” according to Pedretti.

The second reason relates to its ongoing transformation initiatives to improve return on sales from 20.8% in 2023 to 24% by 2026. The initiatives include more targeted pricing, reducing sourcing complexity, developing relationships with key suppliers and implementing techniques of lean management to reduce its. operational footprint.

The cornerstone of the initiatives is the implementation of the so-called Pareto 80/20 principle, whereby a company tends to generate 80% of its sales from 20% of its customers. Focusing on the 20% leads to significant margin expansion (ask Illinois Tool Works investors for an example of its successful implementation).

The combination of opportunity for good sales growth as the housing market recovers and margin expansion from transformation initiatives in the coming years, plus long-term growth from aftermarket servicing of the pool installed base, 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 short, 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 borrowing money because it’s securitized against valuable assets — airplanes) and aerospace suppliers.

Image source: Getty Images.

This may still be the case for the industry as a whole. For example, the International Air Transport Association (IATA) estimates that the industry will generate a return on invested capital of 5.7% in 2024, compared to a weighted average cost of capital (WACC) of approximately 9.1%.

However, some airlines are more equal than others. Of the $30.5 billion IATA expects in net industry profits in 2024, $14.8 billion is expected to come from North America alone. Plus, Wall Street is waiting Delta Air Lines to generate net profit of $3.8 billion, and United Airlines will generate $3.1 billion in 2024.

Moreover, Delta and United management recently argued that the industry has acted rationally to reduce unprofitable capacity during the summer and is improving its revenue per available kilometer (RASM) as a result. This is a sign that, at least in North America, airlines are not reverting to their traditional behavior of continuing to fly less profitable routes in the event of overcapacity.

If this behavior continues, 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 are not buying ON Semiconductor as a vote on its end markets in 2024. They are more focused on its long-term profit prospects.

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There is no doubt that relatively high interest rates have reduced car sales in recent years, and the industrial sector has slowed in line with the slowing economy. This has hindered investment in the automotive sector (especially electric vehicles) and industrial sectors in general. This is bad news for ON Semiconductor’s smart power and sensing solutions.

The impact is particularly damaging for shareholders because the stock’s investment potential is based on its ability to increase content sales per vehicle for electric vehicles (EVs) compared to internal combustion engines. In addition, the stock is expected to achieve sales growth from its clients’ investment in electric vehicle charging networks, renewable energy, advanced driver assistance systems and factory automation.

ON Revenue (TTM) data by YCharts

However, investment in these industries will likely take a temporary hiatus and 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 seems like a great time to buy a long-term growth story.