Whether you see them or not, industrials businesses play a crucial part in our daily activities. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and the industry is currently lagging as its six-month return of 13.6% has trailed the S&P 500’s 16.3% gain.
Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. Taking that into account, here are three industrials stocks that may face trouble.
Watsco (WSO)
Market Cap: $13.17 billion
Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.
Why Should You Sell WSO?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Earnings per share fell by 4.2% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Waning returns on capital imply its previous profit engines are losing steam
At $346.47 per share, Watsco trades at 26.8x forward P/E. If you’re considering WSO for your portfolio, see our FREE research report to learn more.
Generac (GNRC)
Market Cap: $9.07 billion
With its name deriving from a combination of “generating” and “AC”, Generac (NYSE: GNRC) offers generators and other power products for residential, industrial, and commercial use.
Why Are We Wary of GNRC?
- Muted 4.2% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
- Efficiency has decreased over the last five years as its operating margin fell by 9.5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Generac is trading at $158.10 per share, or 21.6x forward P/E. Read our free research report to see why you should think twice about including GNRC in your portfolio.
Corning (GLW)
Market Cap: $70.61 billion
Supplying windows for some of the United States’s earliest spacecraft, Corning (NYSE: GLW) provides glass and other electronic components for the consumer electronics, telecommunications, automotive, and healthcare industries.
Why Do We Think Twice About GLW?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.7% over the last two years was below our standards for the industrials sector
- 4.4 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
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
Corning’s stock price of $82.20 implies a valuation ratio of 30.4x forward P/E. To fully understand why you should be careful with GLW, check out our full research report (it’s free for active Edge members).
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