You've been watching it happen all year, so you already know the market has pulled back in 2022. You also know that it's been a time of volatility in the market, adding to the difficulty of picking good long-term winners. So, what you need to know right now is where to look and when to buy.
For traders on the watch for their next long-term investment but not yet tempted to buy, here are three stocks to put on your watch list for the next time the market pulls back: Roper Technologies (ROP -0.13%), nVent Electric (NVT 0.23%), and Honeywell International (HON -0.86%). Let's look into the reasons why.
1. Roper Technologies
The secret of Roper's success is its business model involving buying asset-light and cash-generative businesses operating as leaders within niche markets. The acquired companies are brought into the Roper fold but left to run independently. However, Roper's management makes capital allocation decisions centrally, and this usually involves using the cash flow generated to pay down debt and begin looking for new acquisition targets.
It's a highly successful model that built a robust collection of businesses. Still, over the years, Roper's management has moved away from its industrial roots to software and technology businesses.
That move was accentuated by the recent agreement to sell a majority stake (51%) in its industrial businesses, with Roper CEO Neil Hunn noting, "The after-tax proceeds from this transaction will expand Roper's M&A firepower to more than $7 billion, which will be targeted toward our large pipeline of high-quality acquisition opportunities."
As such, you can expect Roper to hunt for small businesses in the current environment -- not a bad strategy when prices are likely cheaper. Moreover, history suggests it will work.
The industrial company is a Dividend Aristocrat, but no one buys Roper for its 0.6% dividend yield. Still, Roper keeps hiking its dividend because it's a reliable grower. Let's put this another way: If you had bought the stock in 2010 when it was just $52, its current $2.48 dividend would mean it trades with a 4.8% dividend yield.
Currently trading on more than 26 times analyst estimates for 2022 earnings, Roper isn't a superficially cheap stock, but it's worth monitoring for a market-led pullback.
2. Honeywell International
The case for Honeywell rests on its exposure to several exciting growth markets. The company is one of the best run in the industrial sector, and management's focus on so-called "breakthrough initiatives" produces tangible results. Examples of breakthrough initiatives include its majority-owned stake in the quantum computing business, Quantinuum -- a business management believes will generate $2 billion in revenue by 2026. Similarly, Honeywell's Sustainable Technology Solutions (renewable fuels, clean hydrogen, carbon capture, energy storage, plastics recycling, sustainable refrigerants, etc.) is forecast to grow sales from $200 million in 2021 to $700 million in 2024.
In addition, Honeywell Connected Enterprise (HCE) is the company's digital transformation initiative. Through HCE, customers can virtualize operational technology systems and analyze the data created in the cloud to improve performance. HCE is already a $1.1 billion revenue business, having grown at a compound annual growth rate of 15% since 2019. Honeywell Urban Aerial Mobility (UAM) and Unmanned Aerial Systems (UAS) have $3.5 billion worth of recent order wins. UAM/UAS technology provides avionics and propulsion technologies for use in air taxis, unmanned cargo vehicles, and last-mile delivery drones.
Alongside these exciting initiatives, Honeywell has a clutch of core businesses (aerospace, building technologies, process solutions, e-commerce warehouse automation, Internet of Things sensors, and others) with good growth prospects, and management expects 4%-7% revenue growth over the long-term.
Honeywell is a highly attractive company, but it has a significant number of businesses whose end demand depends on the economy. As such, investors may want to try and pick it up on a pullback if any near-term negative news comes out due to a slowdown in the economy.
3. nVent Electric
A picks-and-shovels play on the electrification trend in the economy, nVent is a company with plenty of growth potential. Unfortunately, it's also a rarity in the marketplace now -- a company whose management decided to raise full-year guidance on its first-quarter earnings call.
The case for buying nVent stock rests on the idea that electrification in the economy is an inevitable trend driven by secular forces. These forces include industrial automation, data centers, renewable energy, electric vehicles, smart buildings, and infrastructure. While spending on these technologies is cyclical to a degree, they are all solutions that add productivity to the global economy, and investment will inevitably flow into them over the long term.
nVent services these markets through its electrical connection and protection solutions (enclosures, electrical & fastening solutions). Therefore, its products are a critical part of electrical installations -- not least to ensure safety and meet regulatory requirements. These qualities, and the electrification trend, mean nVent has plenty of growth potential in the coming years.
In common with Honeywell, cautious investors may want to wait until after the upcoming second-quarter earnings in order to digest any near-term bad news before buying in to a long-term growth story.