October is here. Playoff baseball, pumpkin spice lattes, the upcoming holiday season, and what looks to be another great year for the U.S. stock market are all reasons to smile.
New investors may not be so happy. A roaring bull market is nice when you're in one; but looking in from the outside at high valuations and seeing many stocks that have multiplied in a matter of months can feel intimidating.
We asked some of our contributors which growth stocks would be perfect buys for investors just starting out. They put on their thinking caps and whipped up a trio of ideas. Here's what makes Caterpillar (CAT 0.03%), Ansys (ANSS -1.20%), and AAR Corporation (AIR 1.28%) all great buys now.
An industrial giant on track for a multi-year upswing
Daniel Foelber (Caterpillar): Investors can look no further than FedEx's earnings miss to see the damage that the real economy is feeling from supply chain issues, inflation, and labor shortages. Earthmoving equipment and industrial machinery maker Caterpillar is no different. More than half of Caterpillar's sales come from outside the U.S. Its largest growth market is China, where the real estate industry is wobbling, as evidenced by the Evergrande scandal, among other economic and political woes.
Caterpillar's stock outperformed the S&P 500 in 2020 despite the fact its revenue and earnings were down. The outperformance was due to the expectation that Caterpillar would be on the front lines of an economic recovery. Caterpillar's results have been good but haven't lived up to Wall Street's expectations. As a result, its stock is down nearly 10% in the last three months compared to the market's flat performance.
Caterpillar's upswing may be delayed, but it isn't derailed. A thriving residential housing market bodes well for its construction business. Strong demand for basic materials helps its mining business. The biggest tailwinds are oil and gas, which have been two of the lesser talked about stories in 2021. Oil and gas prices are hovering around their highest levels since the crash of 2014. Despite its reputation as a construction company, Caterpillar's largest business unit is energy and transportation. It makes and services engines, motors, and other industrial equipment that is critical to oil and gas drilling and production, gas compression, marine transportation, and more.
To top it all off, Caterpillar is a Dividend Aristocrat, having raised its annual payout every year for more than 25 years. Its 2.3% dividend yield is the cherry on top of what looks to be a multi-year upswing for Caterpillar's business.
An exciting player in the new industrial age
Scott Levine (Ansys): It's the growth tech stock so nice that Cathie Wood has picked it twice. Ansys, the self-proclaimed "largest engineering simulation company in the world," appears in not one but two of ARK Invest's exchange-traded funds: the ARK Space Exploration & Innovation ETF and the ARK Autonomous Technology & Robotics ETF. Developing engineering simulation software, Ansys provides companies with the ability to anticipate how products -- as well as manufacturing processes -- will operate in actual situations. This helps its customers reduce development costs, leading them to get their products to market quicker.
From aerospace to automotive to healthcare, the customers that rely on Ansys and its software run the gamut of industries, and there are ample related opportunities for growth. In fact, management estimates the total addressable market for simulation will rise to between $15.8 billion and $20.6 billion by 2026, representing growth of about 200% from $6.6 billion in 2018. But that's not to say that the company's growth prospects taper off in 2027. Ansys foresees the total addressable market for new adjacencies -- such as additive manufacturing and the Industrial Internet of Things -- alone soaring from about $4.1 billion in 2026 to approximately $20 billion in 2030.
While new investors may balk at the stock's price tag (about $350 as of this writing), it's important for them to recognize that a seemingly high price tag is not necessarily a barrier to investment. Many brokerage firms now offer the opportunity to buy fractional shares of stocks, so new investors who may not be able to afford whole numbers of shares can still gain positions. Inexperienced investors oftentimes mistakenly believe that having a lot of shares of a given stock is a more advantageous position; however, this is misguided. Instead, investors should consider how much capital they want to invest.
Providing engineering simulation solutions to a wide range of rapidly growing industries, such as electric vehicles, 3D printing, and the Industrial Internet of Things, Ansys has numerous growth avenues which lie before it: a compelling opportunity for new investors with a multi-decade investing horizon.
An aerospace stock for aviation bulls
Lee Samaha (AAR Corp): There's no way to sugarcoat it: If you buy a growth stock, you will have to get on board with the risk that the company might not hit its growth targets. In the case of aviation aftermarket services company AAR Corp, the most significant risk is that the commercial aviation market might not recover as most expect it to.
But here's the thing: It's more of a question of when, not if, flight departures return to 2019 levels. As such, it makes sense to look at the sell-off in AAR Corp's stock (mainly due to fears around the Delta variant disrupting the recovery) as an opportunity to buy into a long-term growth story.
Flight departures matter to AAR Corp, as the company distributes used and original equipment parts to airlines and offers maintenance, repair, and overhaul (MRO) services. More flight departures mean more demand for parts and aviation services. The bulk of its revenue (slightly more than 60%) comes from the commercial market, with the government (primarily defense) making up the rest.
As such, the company is a relatively simple growth stock for new investors to understand. It's simply a play on a recovery in the aviation markets. If that's something you are comfortable with, then AAR is a multi-year recovery story to buy into. Trading at just 13.5 times its estimated fiscal 2022 earnings, AAR Corp looks like a good value.