Whether you see them or not, industrials businesses play a crucial part in our daily activities. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, their overall demand was steady over the past six months as the industry’s 2% return has closely followed the S&P 500.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. Taking that into account, here are three industrials stocks best left ignored.
GMS (GMS)
Market Cap: $4.17 billion
Founded in 1971, GMS (NYSE: GMS) distributes specialty building materials including wallboard, ceilings, and insulation products, to the construction industry.
Why Are We Cautious About GMS?
- 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
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
At $109.61 per share, GMS trades at 17.8x forward P/E. If you’re considering GMS for your portfolio, see our FREE research report to learn more.
Quanex (NX)
Market Cap: $894.7 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Does NX Worry Us?
- Earnings per share fell by 5.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Free cash flow margin shrank by 9.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Eroding returns on capital suggest its historical profit centers are aging
Quanex is trading at $19.57 per share, or 7.2x forward P/E. To fully understand why you should be careful with NX, check out our full research report (it’s free).
Hayward (HAYW)
Market Cap: $3.29 billion
Credited with introducing the first variable-speed pool pump, Hayward (NYSE: HAYW) makes residential and commercial pool equipment and accessories.
Why Does HAYW Give Us Pause?
- Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
- Earnings per share have dipped by 30% annually over the past four years, which is concerning because stock prices follow EPS over the long term
- Free cash flow margin shrank by 5.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
Hayward’s stock price of $15.17 implies a valuation ratio of 19.5x forward P/E. Read our free research report to see why you should think twice about including HAYW in your portfolio.
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