3 Industrials Stocks We Think Twice About

Even if they go mostly unnoticed, industrial businesses are the backbone of our country. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 18.1% for the sector - higher than the S&P 500’s 14.4% return.

Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. Keeping that in mind, here are three industrials stocks we’re steering clear of.

Richardson Electronics (RELL)

Market Cap: $159 million

Founded in 1947, Richardson Electronics (NASDAQ:RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.

Why Are We Out on RELL?

1. Sales pipeline suggests its future revenue growth won’t meet our standards as its backlog averaged 2% declines over the past two years
2. Poor free cash flow margin of -0.4% for the last five years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Richardson Electronics is trading at $10.99 per share, or 62.8x forward P/E. If you’re considering RELL for your portfolio, see our FREE research report to learn more.

Huntington Ingalls (HII)

Market Cap: $12.83 billion

Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE:HII) develops marine vessels and their mission systems and maintenance services.

Why Do We Avoid HII?

1. Average backlog growth of 4.9% over the past two years was mediocre and suggests fewer customers signed long-term contracts
2. Earnings per share fell by 1.1% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Huntington Ingalls’s stock price of $326.91 implies a valuation ratio of 19.7x forward P/E. Check out our free in-depth research report to learn more about why HII doesn’t pass our bar.

Knight-Swift Transportation (KNX)

Market Cap: $8.64 billion

Covering 1.6 billion loaded miles in 2023 alone, Knight-Swift Transportation (NYSE:KNX) offers less-than-truckload and full truckload delivery services.

Why Do We Think KNX Will Underperform?

1. Annual revenue growth of 3.7% over the last two years was below our standards for the industrials sector
2. Free cash flow margin shrank by 10.8 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

At $53.23 per share, Knight-Swift Transportation trades at 29.4x forward P/E. Read our free research report to see why you should think twice about including KNX in your portfolio.

Stocks We Like More

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