3 Industrials Stocks Walking a Fine Line

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, their overall demand was steady over the past six months as the industry’s 4.5% return has closely followed the S&P 500.

Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. Taking that into account, here are three industrials stocks we’re steering clear of.

General Motors (GM)

Market Cap: $50.96 billion

Founded in 1908 by William C. Durant, General Motors (NYSE:GM) offers a range of vehicles and automobiles through brands such as Chevrolet, Buick, GMC, and Cadillac.

Why Does GM Give Us Pause?

1. Weak unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. 7.9 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. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate

General Motors is trading at $53.53 per share, or 5.8x forward P/E. Dive into our free research report to see why there are better opportunities than GM.

Lockheed Martin (LMT)

Market Cap: $99.37 billion

Headquartered in Maryland, Famous for the F-35 aircraft, Lockheed Martin (NYSE:LMT) specializes in defense, space, homeland security, and information technology products.

Why Do We Avoid LMT?

1. Average backlog growth of 7.3% over the past two years was mediocre and suggests fewer customers signed long-term contracts
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 4.9% annually
3. Eroding returns on capital suggest its historical profit centers are aging

Lockheed Martin’s stock price of $425.88 implies a valuation ratio of 15.1x forward P/E. Check out our free in-depth research report to learn more about why LMT doesn’t pass our bar.

XPO (XPO)

Market Cap: $14.16 billion

Owning a mobile game simulating freight operations for the Tour de France, XPO (NYSE:XPO) is a transportation company specializing in expedited shipping services.

Why Are We Out on XPO?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 6.5% annually over the last five years
2. Flat earnings per share over the last two years lagged its peers
3. Free cash flow margin dropped by 7.2 percentage points over the last five years, implying the company became more capital intensive as competition picked up

At $120.22 per share, XPO trades at 29.6x forward P/E. To fully understand why you should be careful with XPO, check out our full research report (it’s free).

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