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 9.7% return over the past six months has topped the S&P 500 by 4 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. On that note, here are three industrials stocks we’re passing on.
Littelfuse (LFUS)
Market Cap: $6.53 billion
The developer of the first blade-type automotive fuse, Littelfuse (NASDAQ:LFUS) provides electrical protection and control components for the automotive, industrial, electronics, and telecommunications industries.
Why Are We Hesitant About LFUS?
- Annual sales declines of 4.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
Littelfuse is trading at $263.42 per share, or 25.3x forward P/E. If you’re considering LFUS for your portfolio, see our FREE research report to learn more.
Plug Power (PLUG)
Market Cap: $1.92 billion
Powering forklifts for Walmart’s distribution centers, Plug Power (NASDAQ:PLUG) provides hydrogen fuel cells used to power electric motors.
Why Do We Steer Clear of PLUG?
- Annual sales declines of 12.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Free cash flow margin dropped by 6,283 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders
At $1.65 per share, Plug Power trades at 2.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than PLUG.
Shyft (SHYF)
Market Cap: $2.91 billion
Notably receiving an order from FedEx for electric vehicles, Shyft (NASDAQ:SHYF) offers specialty vehicles and truck bodies for various industries.
Why Do We Think SHYF Will Underperform?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 13.7% annually over the last two years
- 6.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Diminishing returns on capital suggest its earlier profit pools are drying up
Shyft’s stock price of $12.54 implies a valuation ratio of 12.2x forward P/E. Read our free research report to see why you should think twice about including SHYF in your portfolio.
High-Quality Stocks for All Market Conditions
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