Whether you see them or not, industrials businesses play a crucial part in our daily activities. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 1.7% over the past six months. This drawdown was discouraging since the S&P 500 returned 5.3%.

Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. Taking that into account, here are three industrials stocks we’re steering clear of.

Lincoln Electric (LECO)

Market Cap: $11.3 billion

Headquartered in Ohio, Lincoln Electric (NASDAQ: LECO) manufactures and sells welding equipment for various industries.

Why Do We Think Twice About LECO?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Estimated sales growth of 1.1% for the next 12 months implies demand will slow from its two-year trend
3. Earnings per share lagged its peers over the last two years as they only grew by 6% annually

Lincoln Electric is trading at $195.52 per share, or 21.9x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than LECO.

Nordson (NDSN)

Market Cap: $11.79 billion

Founded in 1954, Nordson Corporation (NASDAQ: NDSN) manufactures dispensing equipment and industrial adhesives, sealants and coatings.

Why Does NDSN Fall Short?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. 5.1 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

At $209.53 per share, Nordson trades at 20.2x forward price-to-earnings. If you’re considering NDSN for your portfolio, see our FREE research report to learn more.

Arrow Electronics (ARW)

Market Cap: $5.51 billion

Founded as a single retail store, Arrow Electronics (NYSE: ARW) provides electronic components and enterprise computing solutions to businesses globally.

Why Do We Pass on ARW?

1. Products and services are facing end-market challenges during this cycle, as seen in its flat sales over the last five years
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.2%
3. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable

Arrow Electronics’s stock price of $105.63 implies a valuation ratio of 8.6x forward price-to-earnings. Check out our free in-depth research report to learn more about why ARW doesn’t pass our bar.

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