Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 20.6% over the past six months. This performance was worse than the S&P 500’s 12.8% fall.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Taking that into account, here are three industrials stocks we’re passing on.

Northwest Pipe (NWPX)

Market Cap: $394.3 million

Playing a large role in the Integrated Pipeline (IPL) project in Texas to deliver ~350 million gallons of water per day, Northwest Pipe (NASDAQ: NWPX) is a manufacturer of pipeline systems for water infrastructure.

Why Should You Sell NWPX?

1. Sales trends were unexciting over the last two years as its 3.7% annual growth was below the typical industrials company
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 2.9% annually
3. Free cash flow margin dropped by 7.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Northwest Pipe’s stock price of $38.07 implies a valuation ratio of 11.6x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than NWPX.

Snap-on (SNA)

Market Cap: $16.51 billion

Founded in 1920, Snap-on (NYSE: SNA) is a global provider of tools, equipment, and diagnostics for various industries such as vehicle repair, aerospace, and the military.

Why Do We Think Twice About SNA?

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. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.7%
3. 4.2 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

Snap-on is trading at $309.37 per share, or 15.5x forward price-to-earnings. Read our free research report to see why you should think twice about including SNA in your portfolio.

Graco (GGG)

Market Cap: $12.84 billion

Founded in 1926, Graco (NYSE: GGG) is an industrial company specializing in the development and manufacturing of fluid-handling systems and products.

Why Are We Wary of GGG?

1. Flat sales over the last two years suggest it must find different ways to grow during this cycle
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 2.3% annually
3. Waning returns on capital imply its previous profit engines are losing steam

At $74.01 per share, Graco trades at 24.6x forward price-to-earnings. To fully understand why you should be careful with GGG, check out our full research report (it’s free).

Stocks We Like More

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