Whether you see them or not, industrials businesses play a crucial part in our daily activities. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 8.9% over the past six months. This drop is a stark contrast from the S&P 500’s 7.5% gain.
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. Taking that into account, here are three industrials stocks we would avoid.
Ford (F)
Market cap: $49.29 billion
Established to make automobiles accessible to a broader segment of the population, Ford (NYSE: F) designs, manufactures, and sells a variety of automobiles, trucks, and electric vehicles.
Why Are We Out on F?
- Declining vehicles sold over the past two years suggest it might have to lower prices to accelerate growth
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
- High net-debt-to-EBITDA ratio of 8× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $12.29 per share, Ford trades at 6.7x forward P/E. To fully understand why you should be careful with F, check out our full research report (it’s free).
Knight-Swift Transportation (KNX)
Market cap: $9.95 billion
Covering 1.6 billion loaded miles in 2023 alone, Knight-Swift Transportation (NYSE: KNX) offers less-than-truckload and full truckload delivery services.
Why Does KNX Worry Us?
- Annual revenue growth of 3.5% over the last two years was below our standards for the industrials sector
- Earnings per share fell by 14.4% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Knight-Swift Transportation’s stock price of $61.16 implies a valuation ratio of 16.2x forward P/E. Dive into our free research report to see why there are better opportunities than KNX.
LGI Homes (LGIH)
Market cap: $1.02 billion
Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Is LGIH Risky?
- Annual sales declines of 10.4% for the past five years show its products and services struggled to connect with the market during this cycle
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
LGI Homes is trading at $43.72 per share, or 14.4x forward P/E. Read our free research report to see why you should think twice about including LGIH in your portfolio.
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