Where to Invest $10,000 Right Now

With markets starting to look expensive it's becoming ever more important to find stocks that look a good long-term value on a risk/reward basis. In other words, if you are going to invest $10,000 right now it's a good idea to do it in businesses you will be happy to hold even if the market has a temporary correction. In this context, let's look at why Raytheon Technologies (RTX 0.66%), PTC (PTC -0.34%) and Deere (DE -0.48%) are attractive stocks for long-term investors. 

Image source: Getty Images.

Raytheon Technologies

The case for buying Raytheon Technologies is based on the fact that 55% of its revenue comes from defense. So, if stocks in the defense sector are currently valued at an average of around 20 times free cash flow (FCF), then Raytheon's defense business should be worth 20 times FCF, too.

Data by YCharts

Based on chief financial officer Toby O'Brien's presentation at a recent UBS conference, the legacy Raytheon businesses (largely defense) remain on track for around $3.5 billion in FCF in 2020. However, the legacy United Technologies businesses (largely commercial aviation) are targeting breakeven in FCF for 2020.

Assuming the Raytheon businesses are worth 20 times $3.5 billion gives a value of $70 billion, and if you subtract this from the market cap of $107 billion it leaves $37 billion for the commercial aerospace businesses, Collins Aerospace and Pratt & Whitney. While that figure is not quite as attractive as it was a month ago, it still looks like a good value.

Collins Aerospace generated $4.4 billion in operating profit in 2019, and Pratt & Whitney $1.8 billion, making a combined figure of $6.2 billion. To be clear, it's going to be a long road back, with O'Brien arguing (at the UBS event) that a full recovery in the commercial aviation market wouldn't take place until 2022 at the earliest. Nevertheless, even if it takes three years to get near 2019 levels of profitability, I'd argue that $37 billion is still too low of a figure for the value of commercial aviation businesses.

PTC

The industrial software company is an exciting growth stock set to benefit from strong demand for its core products of computer aided design (CAD) software and product lifecycle management (PLM) software while there's explosive potential for its internet of things (IoT) and augmented reality (AR) solutions.

The following figures were given on a PTC presentation in April, and as you can see below, its traditional CAD revenue generated 54% of revenue in 2019 -- but that's set to fall to 35% in 2024 due to strong growth in IoT and AR.

Data source: PTC presentations.

In a nutshell, PTC is a play on the so-called fourth industrial revolution or Industry 4.0. These grandiose titles simply refer to use of IoT devices in order to create even more automated fatories. With PLM, customers can use the iterative information gathered via web enabled devices to better manage the lifecycle of a product from creation (using CAD) though to production and ultimately, disposal.

IoT will help industrial companies digitize their production by using web enabled devices to monitor, analyze, and guide their physical assets, and AR will allow this process to be carried out remotely. So for example, IoT will encourage companies to invest in robotics and automation on a production line, and AR will let a skilled engineer inspect it without being on-premise.

Image source: Getty Images.

In this context, it's not hard to see why PTC chief executive officer Jim Heppelmann said on a recent earnings call that "We expect that the new normal that follows this crisis will create stronger tailwind to the already high-growth IoT and AR markets, and will make PLM more relevant than ever."

That's good to hear. Management had to reduce its full-year guidance for average recurring revenue growth in 2020 from 12% to 15% to 9% to 12% as a result of the COVID-19 pandemic. However, Heppelmann's comments imply that the company play catch up in 2021 and get back on track for its long-term aim for $730 million to $930 million in FCF in 2024. Given that the current market cap is only $9.7 billion, anything within that range would make the stock look like a great value in the future.

Deere

The agricultural equipment maker has faced a number of hits in recent years. The collapse in key crop prices (wheat, corn, soybeans, and cotton) in 2014 hurt farmers' income, while the trade war created ongoing uncertainty around the prospects for U.S. farmers to export soybeans to China. Throw in the COVID-19 pandemic, and the list of headwinds gets even longer.

Note the drop in farmers' cash receipts from crops in 2014-2016 and the decline in Deere's income.

Data source: Deere presentations, USDA.

It's going to be a difficult year for Deere, but there's reason to believe that it's likely to prove a trough year in a multi-year recovery. There are some early indications that grain demand is up as a consequence of the phase 1 trade deal with China.

Food demand will recover with an overall economic recovery. Moreover, as the chart above shows, U.S. farm income from crops has been recovering in recent years, and according to Deere's management the aged fleet of farming equipment in the U.S. is in need of replacement. Finally, Deere has been making substantive progress with its precision agriculture solutions (smart farming).

Wall Street analysts have Deere's earnings recovering from $6.07 per share in 2020 to $8.57 in 2021, putting it on 19 times 2021 earnings. That's a decent value provided the multi-year recovery thesis holds.