3 Industrials Stocks We Keep Off Our Radar

Whether you see them or not, industrials businesses play a crucial part in our daily activities. 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 17.4% return over the past six months has topped the S&P 500 by 4.1 percentage points.

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 swiping left on.

Methode Electronics (MEI)

Market Cap: $244.7 million

Founded in 1946, Methode Electronics (NYSE:MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).

Why Should You Sell MEI?

1. Flat sales over the last five years suggest it must find different ways to grow during this cycle
2. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
3. High net-debt-to-EBITDA ratio of 6× increases the risk of forced asset sales or dilutive financing if operational performance weakens

At $6.92 per share, Methode Electronics trades at 90.5x forward P/E. If you’re considering MEI for your portfolio, see our FREE research report to learn more.

Stanley Black & Decker (SWK)

Market Cap: $11.6 billion

With an iconic “STANLEY” logo which has remained virtually unchanged for over a century, Stanley Black & Decker (NYSE:SWK) is a manufacturer primarily catering to the tool and outdoor equipment industry.

Why Do We Avoid SWK?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Incremental sales over the last five years were much less profitable as its earnings per share fell by 9.6% annually while its revenue grew
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 5.7 percentage points

Stanley Black & Decker’s stock price of $74.86 implies a valuation ratio of 14.7x forward P/E. Dive into our free research report to see why there are better opportunities than SWK.

Packaging Corporation of America (PKG)

Market Cap: $18.53 billion

Founded in 1959, Packaging Corporation of America (NYSE: PKG) produces containerboard and corrugated packaging products as well as displays and package protection.

Why Does PKG Worry Us?

1. Muted 5.7% annual revenue growth over the last five years shows its demand lagged behind its industrials peers
2. Gross margin of 22.8% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Packaging Corporation of America is trading at $207.39 per share, or 19.1x forward P/E. Read our free research report to see why you should think twice about including PKG in your portfolio.

Stocks We Like More

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