3 Industrials Stocks We're Skeptical Of

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 30.9% return over the past six months has topped the S&P 500 by 9.7 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. Keeping that in mind, here are three industrials stocks we’re passing on.

Belden (BDC)

Market Cap: $4.73 billion

With its enamel-coated copper wire used in WWI for the Allied forces, Belden (NYSE:BDC) designs, manufactures, and sells electronic components to various industries.

Why Does BDC Worry Us?

1. Sales were flat over the last two years, indicating it’s failed to expand this cycle
2. Earnings per share lagged its peers over the last two years as they only grew by 1.8% annually
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Belden’s stock price of $120.28 implies a valuation ratio of 15.8x forward P/E. If you’re considering BDC for your portfolio, see our FREE research report to learn more.

Honeywell (HON)

Market Cap: $125.1 billion

Originally founded in 1906 as a thermostat company, Honeywell (NASDAQ:HON) is a multinational conglomerate known for its aerospace systems, building technologies, performance materials, and safety and productivity solutions.

Why Are We Hesitant About HON?

1. 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
2. Sales are projected to tank by 3.4% over the next 12 months as demand evaporates
3. Eroding returns on capital suggest its historical profit centers are aging

Honeywell is trading at $197 per share, or 19.1x forward P/E. Read our free research report to see why you should think twice about including HON in your portfolio.

Meritage Homes (MTH)

Market Cap: $4.68 billion

Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE:MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.

Why Do We Pass on MTH?

1. Demand cratered as it couldn’t win new orders over the past two years, leading to an average 34.4% decline in its backlog
2. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $66.40 per share, Meritage Homes trades at 9.5x forward P/E. If you’re considering MTH for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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