2 Growth Stocks to Buy on the Dip

Preparing to buy stocks on a dip implies a belief that these stocks could decline. Frankly, that's not an unusual assumption in the current environment. The global economy is weakening, and there could be more negative earnings surprises down the line.

Given this understanding, it makes sense to look at stocks with strong long-term growth prospects that will continue when a recession is over. I think industrial software company PTC (PTC 0.43%) and electrical product maker nVent Electric (NVT -1.46%) fit the bill. Here's why. 

Positive thematic trends

The key to the argument is that both stocks are beneficiaries of positive ongoing and long-term thematic trends. In the case of nVent, it's the trend toward electrification in the economy. Meanwhile, PTC is a key player in the so-called Fourth Industrial Revolution that will change the face of manufacturing in the future. 

Interestingly, both companies have raised their full-year guidance through 2022; no mean feat considering what a challenging year it's been for the industrial sector. This speaks to the underlying appeal of their products and software and supports the idea that they are solutions that customers won't cut spending on in a hurry. 

nVent and electrification

The company is a leading manufacturer of electrical connection and protection products. Its solutions include electrical enclosures, electrical fastening solutions, and thermal management solutions.

As such, they are mission-critical components in an electrical installation and are necessary to meet global regulatory standards. For example, consider the cost incurred at, say, a data center or industrial plant if there's an electrical failure causing downtime in operation. 

It's a great product range in the new economy, emphasizing connectivity and electrification. Whether it's industrial automation, electric vehicles, smart buildings and infrastructure, electric rail, or data and telecoms, the world is getting electrified, and nVent is a pick-and-shovel way to play that trend. 

As seen in the table below, management has significantly increased its full-year sales growth expectations throughout the year. However, the earnings per share (EPS) guidance increase is not as much as might be expected (given the sales growth) because nVent is offsetting foreign exchange and inflationary headwinds this year, as well as the much-documented supply chain issues bedeviling the global economy.

Data source: nVent presentations.

That said, it's still an impressive performance in a year when global growth is likely to turn out less than most expected at the start of the year. 

In addition, nVent's valuation is attractive. Wall Street estimates nVent will hit $2.22 in EPS (at the high end of management's guidance) in 2022 and then $2.42 in 2023. The latter would put the stock on less than 14 times earnings. That's a good valuation for a company with earnings momentum and long-term growth prospects.

PTC's long-term growth prospects

Continuing the valuation discussion, PTC is not superficially a cheap stock. It trades on more than 26 times estimated 2022 earnings and less than 23 times estimated 2023 earnings. Moreover, there's no guarantee the company will hit those earnings estimates in the current environment.

With the bad news out of the way, it's time to focus on its exciting long-term prospects. They come from the company's relevance to the growth of the use of digital technology in the industrial sector.

Through web-enabled sensors and devices, industrial customers can connect equipment and generate massive amounts of data to be analyzed and used to create actionable insights. PTC's Internet of Things (IoT) software helps customers do that, and its augmented reality (AR) solutions help deliver complex data to its frontline workers in a simple form.

Think of a factory operating more efficiently after designers have treated a digital twin and analyzed so operators can better predict when the physical plant machinery needs servicing. For AR, consider a complex processing plant where workers need to inspect pipes and valves visually; an AR overlay on a tablet would help them understand the layout. 

In addition, the value of its core computer-aided design (CAD) and product lifecycle management (PLM) is also boosted by the growth of digital and cloud-based technology. For example, CAD designers can better collaborate over work and make real-time adjustments in line with collaborators' input. Similarly, PTC's PLM solutions are more productive using real-time data from IoT. 

In a nutshell, PTC's solutions are the future of manufacturing. As digital adoption grows, PTC's revenue will increase, and the company will grow into its valuation.