Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the industry has underperformed the market over the past six months as its 2.1% return lagged the S&P 500 by 10.9 percentage points.
A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. On that note, here are three industrials stocks we would avoid.
Worthington (WOR)
Market Cap: $2.78 billion
Founded by a steel salesman, Worthington (NYSE:WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.
Why Is WOR Risky?
- Annual sales declines of 15.3% for the past five years show its products and services struggled to connect with the market during this cycle
- Earnings per share have contracted by 9.1% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
At $56.95 per share, Worthington trades at 15.3x forward P/E. Dive into our free research report to see why there are better opportunities than WOR.
Arrow Electronics (ARW)
Market Cap: $10.71 billion
Founded as a single retail store, Arrow Electronics (NYSE:ARW) provides electronic components and enterprise computing solutions to businesses globally.
Why Does ARW Give Us Pause?
- The company has faced growth challenges as its 1.9% annual revenue increases over the last five years fell short of other industrials companies
- High input costs result in an inferior gross margin of 12.2% that must be offset through higher volumes
- Diminishing returns on capital suggest its earlier profit pools are drying up
Arrow Electronics’s stock price of $211.45 implies a valuation ratio of 9.3x forward P/E. If you’re considering ARW for your portfolio, see our FREE research report to learn more.
Crown Holdings (CCK)
Market Cap: $12.98 billion
Formerly Crown Cork & Seal, Crown Holdings (NYSE:CCK) produces packaging products for consumer marketing companies, including food, beverage, household, and industrial products.
Why Are We Hesitant About CCK?
- Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.9% for the last five years
- Gross margin of 20.3% reflects its high production costs
- Earnings per share lagged its peers over the last five years as they only grew by 2.3% annually
Crown Holdings is trading at $120.76 per share, or 14.2x forward P/E. Check out our free in-depth research report to learn more about why CCK doesn’t pass our bar.
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