Whether you see them or not, industrials businesses play a crucial part in our daily activities. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 46.2% for the sector - higher than the S&P 500’s 33.2% return.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Keeping that in mind, here are three industrials stocks we’re swiping left on.
Kimball Electronics (KE)
Market Cap: $694.8 million
Founded in 1961, Kimball Electronics (NYSE: KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.
Why Do We Avoid KE?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 9.7% annually over the last two years
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 8.1%
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
Kimball Electronics’s stock price of $28.78 implies a valuation ratio of 28.5x forward P/E. To fully understand why you should be careful with KE, check out our full research report (it’s free for active Edge members).
Hayward (HAYW)
Market Cap: $3.37 billion
Credited with introducing the first variable-speed pool pump, Hayward (NYSE: HAYW) makes residential and commercial pool equipment and accessories.
Why Is HAYW Not Exciting?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Earnings per share have dipped by 30% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.9 percentage points
At $15.57 per share, Hayward trades at 20x forward P/E. If you’re considering HAYW for your portfolio, see our FREE research report to learn more.
KB Home (KBH)
Market Cap: $4.18 billion
The first homebuilder to be listed on the NYSE, KB Home (NYSE: KB) is a homebuilding company targeting the first-time home buyer and move-up buyer markets.
Why Do We Pass on KBH?
- Backlog has dropped by 20.4% on average over the past two years, suggesting it’s losing orders as competition picks up
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
- 5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
KB Home is trading at $64.50 per share, or 10.6x forward P/E. Dive into our free research report to see why there are better opportunities than KBH.
Stocks We Like More
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