Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 2.2% over the past six months. This drop was discouraging since the S&P 500 held steady.

Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. With that said, here is one industrials stock poised to generate sustainable market-beating returns and two we’re passing on.

Two Industrials Stocks to Sell:

A. O. Smith (AOS)

Market Cap: $9.63 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 Are We Wary of AOS?

1. 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
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5 percentage points

At $67.60 per share, A. O. Smith trades at 16.7x forward price-to-earnings. Read our free research report to see why you should think twice about including AOS in your portfolio.

Plug Power (PLUG)

Market Cap: $1.55 billion

Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ: PLUG) provides hydrogen fuel cells used to power electric motors.

Why Do We Think PLUG Will Underperform?

1. Sales trends were unexciting over the last two years as its 1.3% annual growth was below the typical industrials company
2. 138.1 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

Plug Power’s stock price of $1.71 implies a valuation ratio of 1.9x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PLUG.

One Industrials Stock to Buy:

Verra Mobility (VRRM)

Market Cap: $3.18 billion

Managing over 165 million tolling transactions per year, Verra Mobility (NYSE: VRRM) is a leading provider of smart mobility technology that enhances safety, efficiency, and convenience on roadways.

Why Will VRRM Beat the Market?

1. Annual revenue growth of 14.4% over the last five years was superb and indicates its market share increased during this cycle
2. Offerings are difficult to replicate at scale and result in a best-in-class gross margin of 62.3%
3. Robust free cash flow margin of 19.6% gives it many options for capital deployment, and its growing cash flow gives it even more resources to deploy

Verra Mobility is trading at $20.13 per share, or 15.2x forward price-to-earnings. Is now the right time to buy? Find out in our full research report, it’s free.

Stocks We Like Even More

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 9 Market-Beating Stocks. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like United Rentals (+322% five-year return). Find your next big winner with StockStory today for free.