Whether you see them or not, industrials businesses play a crucial part in our daily activities. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 17.4% gain over the past six months, beating the S&P 500 by 2.1 percentage points.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here are three industrials stocks we’re passing on.
Alta (ALTG)
Market Cap: $169.6 million
Founded in 1984, Alta Equipment Group (NYSE: ALTG) is a provider of industrial and construction equipment and services across the Midwest and Northeast United States.
Why Should You Sell ALTG?
- Sales trends were unexciting over the last two years as its 1.1% annual growth was below the typical industrials company
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
Alta’s stock price of $5.26 implies a valuation ratio of 1x forward EV-to-EBITDA. To fully understand why you should be careful with ALTG, check out our full research report (it’s free for active Edge members).
Fastenal (FAST)
Market Cap: $46.9 billion
Founded in 1967, Fastenal (NASDAQ: FAST) provides industrial and construction supplies, including fasteners, tools, safety products, and many other product categories to businesses globally.
Why Are We Cautious About FAST?
- Annual revenue growth of 4.8% over the last two years was below our standards for the industrials sector
- Performance over the past two years shows its incremental sales were less profitable, as its 3.7% annual earnings per share growth trailed its revenue gains
- Free cash flow margin dropped by 1.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Fastenal is trading at $41 per share, or 34.9x forward P/E. Check out our free in-depth research report to learn more about why FAST doesn’t pass our bar.
Landstar (LSTR)
Market Cap: $4.47 billion
Covering billions of miles throughout North America, Landstar (NASDAQ: LSTR) is a transportation company specializing in freight and last-mile delivery services.
Why Do We Think LSTR Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 8.9% annually over the last two years
- Performance over the past five years shows its incremental sales were less profitable as its earnings per share were flat
- Waning returns on capital imply its previous profit engines are losing steam
At $130.13 per share, Landstar trades at 25.1x forward P/E. Read our free research report to see why you should think twice about including LSTR in your portfolio.
Stocks We Like More
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