It’s no secret that if you’re looking for strong returns for your portfolio, growth stocks normally perform the best. However, not all growth stocks are created equal, and sometimes finding a good buy can be difficult. For instance, if you look at the NASDAQ, you’ll find many great growth stocks, but many are valued at high multiples, and so the amount of upside left might be limited.
Finding a growth stock that hasn’t soared in price is where you might have a great opportunity to score a big return. There is one stock that recently peaked my interest that could fit this criterion and generate significant returns for investors.
CAE (TSX:CAE)(NYSE:CAE) provides solutions for wide range of industries, including aviation, healthcare, and defence. While that may not sound like your typical growth stock, by having customers in many different industries, there are many avenues that the company can grow. CAE also recently announced that it would be investing a billion dollars into innovating its products and services over the next five years.
Why does this matter?
Innovation and staying ahead of competition is what keeps stocks like Amazon.com and Shopify ahead of the pack and generating strong returns for their shareholders. Even despite minimal profits, or even an absence of earnings altogether, investors have been more than willing to buy up stocks of companies that continually innovate and that find ways to grow sales.
Although CAE has only seen its sales rise by 34% over the past four years, a big investment like this could help accelerate that rate of growth.
The proof is in the results: companies that invest in research in development enjoy a positive relationship with their share price. Just have a look at the clear relationship we see with Amazon’s stock and how much it has spent on innovation:
The same trend is evident when we look at Shopify as well:
Companies that spend a lot on research and development are investing in better products and services for tomorrow, and so we could see a similar impact on CAE’s planned expenditures. By offering the latest and greatest training solutions, it will be a way to attract more customers and add to the company’s top and bottom lines as well.
The one advantage that CAE has over stocks that focus heavily on growth is that it’s been able to consistently stay in the black, averaging a profit margin of about 10% during the past five years. If it can maintain that and grow its sales from these initiatives, this is a stock that could be soaring in the years to come.
CAE has already proven to be a very stable and strong investment with returns of over 130% in the past five years, and investors earn a dividend on top of that as well. The stock is a very good value, as it trades at a modest 21 times earnings, which is well below industry averages. CAE was a good buy before this news, and now it’s an even better one for investors looking to hold on for the long term.