Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 1.2% over the past six months. This performance is a far cry from the S&P 500’s 11.3% ascent.
Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. On that note, here are three industrials stocks we’re steering clear of.
Builders FirstSource (BLDR)
Market Cap: $7.81 billion
Headquartered in Irving, TX, Builders FirstSource (NYSE: BLDR) is a construction materials manufacturer that offers a variety of lumber and lumber-related building products.
Why Is BLDR Risky?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- 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
Builders FirstSource is trading at $72.64 per share, or 18.3x forward P/E. Dive into our free research report to see why there are better opportunities than BLDR.
AeroVironment (AVAV)
Market Cap: $8.71 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Does AVAV Worry Us?
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 13.5 percentage points
- Cash-burning history makes us doubt the long-term viability of its business model
- Push for growth has led to negative returns on capital, signaling value destruction
AeroVironment’s stock price of $173.87 implies a valuation ratio of 53.6x forward P/E. Read our free research report to see why you should think twice about including AVAV in your portfolio.
Watsco (WSO)
Market Cap: $12.28 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 Are We Bearish on WSO?
- Sales tumbled by 1% annually over the last two years, showing market trends are working against it during this cycle
- Earnings per share decreased by more than its revenue over the last two years, partly because it diluted shareholders
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $319.94 per share, Watsco trades at 24.9x forward P/E. If you’re considering WSO for your portfolio, see our FREE research report to learn more.
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