Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, the tide is turning in their favor as the industry’s 19.6% return over the past six months has topped the S&P 500 by 4.3 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 steering clear of.
Shoals (SHLS)
Market Cap: $1.33 billion
Started in Huntsville, Alabama, Shoals (NASDAQ: SHLS) designs and manufactures products that make solar energy systems work more efficiently.
Why Is SHLS Not Exciting?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 2.1% annually over the last two years
- Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $7.97 per share, Shoals trades at 15.3x forward P/E. Check out our free in-depth research report to learn more about why SHLS doesn’t pass our bar.
Lindsay (LNN)
Market Cap: $1.25 billion
A pioneer in the field of center pivot and lateral move irrigation, Lindsay (NYSE: LNN) provides a variety of proprietary water management and road infrastructure products and services.
Why Are We Cautious About LNN?
- 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
- Sales are projected to be flat over the next 12 months and imply weak demand
- Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.7% annually
Lindsay is trading at $118.00 per share, or 19.6x forward P/E. To fully understand why you should be careful with LNN, check out our full research report (it’s free for active Edge members).
Fortive (FTV)
Market Cap: $16.95 billion
Taking its name from the Latin root of "strong", Fortive (NYSE: FTV) manufactures products and develops industrial software for numerous industries.
Why Do We Avoid FTV?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Earnings per share were flat over the last five years and fell short of the peer group average
- ROIC of 5.5% reflects management’s challenges in identifying attractive investment opportunities, and its decreasing returns suggest its historical profit centers are aging
Fortive’s stock price of $53.35 implies a valuation ratio of 18.7x forward P/E. Read our free research report to see why you should think twice about including FTV in your portfolio.
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