Based on conventional metrics, aerospace & defense giant Raytheon Technologies (RTX 0.82%) and agriscience company Corteva (CTVA -0.11%) are not conventionally cheap stocks. However, they all have significant upside potential in the coming years, and their outperformance versus the S&P 500 is likely to continue. Here's why. 

High performance, high valuations

First, a quick look at the share price performance of the stocks shows just how well they have done this year.

^SPX Chart

Data by YCharts

It's a performance that's led to their valuations starting to look expensive at first glance. For reference, the chart below shows enterprise value (market cap plus net debt), or EV, to earnings before interest, taxation, depreciation, and amortization, or EBITDA. It's a commonly used valuation metric, and although there's no hard and fast rule as to what EV/EBITDA multiples a company should trade at, a multiple of around 11 is often seen as representing a reasonable value for a mature company. But, as demonstrated below, both of these companies trade at premiums to that figure based on their current earnings. 

CTVA EV to EBITDA Chart

Data by YCharts

However, there's a reason why both stocks are highly rated, and it comes down to their growth potential in the coming years. 

Raytheon Technologies 

The leading industrial company has exposure to two markets that look set for good medium-term growth. Going into 2022, Raytheon's playbook was for significantly increased profits from its commercial aerospace-focused businesses, Collins Aerospace and Pratt & Whitney, while its defense-focused businesses, Raytheon Missiles & Defense and Raytheon Intelligence & Space, were supposed to deliver solid if uninspiring profit increases. 

As such, the investment case for the stock was built on the commercial aviation industry embarking on a multi-year recovery to 2019 levels by 2024. 

While that remains the case, the conflict in Ukraine has refocused governments' need to increase spending on defense. In fact, at a recent investment conference, Raytheon's management said it was seeing "an incredible amount of demand" for its defense products, including those used in the combat theatre in Ukraine. CFO Neil Mitchill sees mid-to-high-single-digit annual growth for the defense business to 2025. Ultimately, Wall Street analysts see Raytheon's EV/EBITDA multiple dropping to 9.5 times by 2024. All told, both Raytheon's end markets are in growth mode, and it should be able to easily grow into its valuation. 

Corteva 

This seed and crop protection company is having an excellent year, and it's just starting to deliver on the long-term potential that investors, including hedge fund Starboard Value, have long seen in the company. The case for buying the stock is based on two interconnected profit drivers. First, Corteva has the potential to restructure and cut costs to approach the margins of its rivals. Second, by expanding products under its own technology patents (specifically its seed and crop protection systems), Corteva has an opportunity to significantly reduce its net royalties paid to other companies to use their technology. 

Corteva is making progress on both objectives. For example, despite facing up to $520 million in cost headwinds from increased input costs and logistics in the first half, the company still managed to increase EBITDA by 26.6% to $2.76 billion in the first half. Productivity actions delivered $130 million in cost savings. Looking ahead, management expects to deliver a further $400 million in annual cost savings by 2025.

Turning to the issue of reducing net royalties, Corteva is having great success establishing its Enlist seed and crop protection system (reaching 45% of soybean planted in the U.S. in 2022, having only been on the market for three years). Through the growth of products like Enlist, management expects to cut net royalties by 50% by 2025 -- approximating to a $250 million cut in net annual royalties by 2025.

Based on management's projections, Corteva's EBITDA margin will expand from 17.4% in 2022 to a range of 21%-23% in 2025. It would represent a significant profit expansion, and given that Wall Street analysts expect Corteva's EV/EBITDA multiple to be below 11 times in 2024, the stock looks like a good value.