Whether you see them or not, industrials businesses play a crucial part in our daily activities. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, the tide is turning in their favor as the industry’s 27% return over the past six months has topped the S&P 500 by 17.9 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. Keeping that in mind, here are three industrials stocks we’re swiping left on.
A. O. Smith (AOS)
Market Cap: $11.2 billion
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE:AOS) manufactures water heating and treatment products for various industries.
Why Does AOS Give Us Pause?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Projected sales growth of 3.6% for the next 12 months suggests sluggish demand
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 2.2% annually
At $80.46 per share, A. O. Smith trades at 19.7x forward P/E. Check out our free in-depth research report to learn more about why AOS doesn’t pass our bar.
Graco (GGG)
Market Cap: $15.56 billion
Founded in 1926, Graco (NYSE:GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.
Why Is GGG Not Exciting?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Earnings per share have dipped by 1.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital suggest its earlier profit pools are drying up
Graco is trading at $94.22 per share, or 29.2x forward P/E. Dive into our free research report to see why there are better opportunities than GGG.
BrightView (BV)
Market Cap: $1.31 billion
An official field consultant for Major League Baseball, BrightView (NYSE:BV) offers landscaping design, development, and maintenance.
Why Should You Dump BV?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 1.8% annually over the last two years
- Earnings per share have contracted by 3.3% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Underwhelming 2.9% return on capital reflects management’s difficulties in finding profitable growth opportunities
BrightView’s stock price of $13.91 implies a valuation ratio of 18x forward P/E. Read our free research report to see why you should think twice about including BV in your portfolio.
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