3 Industrials Stocks in Hot Water

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 2.4%. This performance was discouraging since the S&P 500 returned 1.1%.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks we’re steering clear of.

Methode Electronics (MEI)

Market Cap: $324.8 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. Sales were flat over the last five years, indicating it’s failed to expand this cycle
2. Free cash flow margin shrank by 19.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Methode Electronics’s stock price of $9.10 implies a valuation ratio of 13.7x forward P/E. Dive into our free research report to see why there are better opportunities than MEI.

Packaging Corporation of America (PKG)

Market Cap: $16.64 billion

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

Why Do We Think PKG Will Underperform?

1. Muted 1.4% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Gross margin of 22.7% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Earnings per share have contracted by 4.2% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

At $185.59 per share, Packaging Corporation of America trades at 11.4x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including PKG in your portfolio.

Silgan Holdings (SLGN)

Market Cap: $5.75 billion

Established in 1987, Silgan Holdings (NYSE:SLGN) is a supplier of rigid packaging for consumer goods products, specializing in metal containers, closures, and plastic packaging.

Why Is SLGN Risky?

1. Annual sales declines of 3% for the past two years show its products and services struggled to connect with the market during this cycle
2. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
3. Earnings per share have contracted by 2.7% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Silgan Holdings is trading at $53.70 per share, or 12.9x forward P/E. Check out our free in-depth research report to learn more about why SLGN doesn’t pass our bar.

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