3 Hot Stocks That Can Live Up to Their Lofty Valuations

There's much more to investing than buying low and selling high, and there's much more to stock valuation than buying on a low price-to-earnings (P/E) ratio. On the other hand, sometimes it makes sense to buy a high P/E stock because its growth prospects justify its current valuation. That's how investors should think about investing in Rockwell Automation (ROK -0.28%), Delta Air Lines (DAL -2.62%), and infrastructure software company Bentley Systems (BSY 0.04%). Here's why all three are exciting stocks for 2023. 

1. Rockwell Automation, a company with exceptional growth prospects  

The leading U.S. industrial automation company, Rockwell, currently trades on 30 times earnings. That may seem expensive, but Rockwell has excellent earnings momentum, and its long-term growth looks assured. For example, management recently upgraded its expectation for organic revenue growth guidance range in its financial 2023 from an initial 9% to 13% to an updated 11% to 15%.

It's all the more impressive as it comes in a year of slowing industrial sector growth. It also speaks to the increasing demand for automation in the global economy. The ongoing supply chain issues in the economy are partly due to labor shortages and the difficulty of hiring skilled workers in specific industries. In addition, many companies are trying to reduce the complexity of their supply chains and reliance on myriad, faraway suppliers. In both cases, automation is the answer, enabling production to be reshored from low-labor-cost countries and reducing the number of workers in a facility. 

If these trends continue, Rockwell appears poised to grow into its valuation soon enough. 

2. Bentley Systems, a growth stock that's building the future

Trading on 67 times current earnings,  it's easy to quickly dismiss Bentley's stock as being too expensive. However, Bentley Systems is a company with exciting long-term growth prospects. 

Management describes Bentley as "The infrastructure engineering software company."They have a point because Bentley is the only software company with a significant market presence across all aspects of infrastructure projects (from utilities, roads, bridges, and rail transport infrastructure, to water, public works, and municipal work). Moreover, Bentley is a market leader in nearly all those sectors and a leader in all functions, including modeling, simulation, project delivery, and asset performance.

Infrastructure and major construction projects tend to be huge and highly complex, involving many contractors, consultants, and project managers. Traditionally, most of the information and valuable data from the projects is kept disparately in files held by myriad engineers. However, Bentley's solutions help to digitally design, model, and simulate the project while collating and storing all the information.

Consider a major construction project in the middle of a city with restricted access. Bentley's solutions can help precisely model the project's construction before it even starts. In addition, project adjustments can be much more easily managed if they are made using digitally modeled information stored in one place. 

Finally, infrastructure projects require decades of maintenance (think rail networks, roads, bridges, dams, etc.), and here again, it makes sense to digitally "twin" the project to model and simulate (using real-time data) the physical project to maintain it better.

Wall Street analysts have Bentley growing revenue at a double-digit annual rate to 2024 and operating profit growing at a mid-teens yearly rate over the same period. With the outlook for infrastructure spending looking excellent following the infrastructure bill, and Bentley's ability to grow the use of digital technology within it, the future looks very bright.

3. Delta Air Lines, a cheap stock if air travel holds up

This is one for commercial aerospace bulls. Trading on 19 times current earnings, the airline doesn't look cheap on current earnings, not least for a highly cyclical stock whose revenue and earnings oscillate with the cycle of demand for air travel. 

That said, it's not expensive if you believe we are in the early innings of the cycle. Delta's management's guidance for EPS of $5 to $6 in 2023 and $7 in 2024, and free cash flow (FCF) of $2 billion in 2023 and $4 billion in 2024 imply that we are. To put those figures into context, they imply a forward P/E ratio of around 7 times earnings for 2023 and 5.5 times earnings for 2024.

Clearly, the market is worried about a cyclical slowdown in air travel, but so far, it's not seen in Delta's numbers with things like advance bookings and corporate travel surveys. As such, Delta remains on track for its guidance, and if you think it will continue to do so, with air travel holding up, then the stock is very attractive for investors.