1 Industrials Stock to Research Further and 2 Facing Challenges

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 12.5% for the sector - higher than the S&P 500’s 5.6% 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 is one resilient industrials stock at the top of our wish list and two we’re swiping left on.

Two Industrials Stocks to Sell:

Kimball Electronics (KE)

Market Cap: $587.9 million

Founded in 1961, Kimball Electronics (NYSE:KE) is a global contract manufacturer specializing in electronics and manufacturing solutions for automotive, medical, and industrial markets.

Why Do We Think KE Will Underperform?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.9% annually over the last two years
2. Falling earnings per share over the last five years has some investors worried as stock prices ultimately follow EPS over the long term
3. Low free cash flow margin of -0.8% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $24.25 per share, Kimball Electronics trades at 18.4x forward P/E. To fully understand why you should be careful with KE, check out our full research report (it’s free).

Genco (GNK)

Market Cap: $1.00 billion

Headquartered in NYC, Genco (NYSE:GNK) is a shipping company that transports dry bulk cargo along worldwide maritime routes.

Why Should You Dump GNK?

1. Sluggish trends in its owned vessels suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Sales were less profitable over the last two years as its earnings per share fell by 43.5% annually, worse than its revenue declines
3. Free cash flow margin dropped by 55.6 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Genco’s stock price of $23.32 implies a valuation ratio of 21.3x forward P/E. Check out our free in-depth research report to learn more about why GNK doesn’t pass our bar.

One Industrials Stock to Watch:

Flowserve (FLS)

Market Cap: $10.36 billion

Manufacturing the largest pump ever built for nuclear power generation, Flowserve (NYSE:FLS) manufactures and sells flow control equipment for various industries.

Why Do We Like FLS?

1. Gross margin of 31.2% is reasonable for the industry and allows for steady investments in marketing and R&D
2. Share repurchases over the last two years enabled its annual earnings per share growth of 29.8% to outpace its revenue gains
3. Free cash flow margin jumped by 3.7 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends

Flowserve is trading at $81.37 per share, or 20x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.

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