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 8.2% has trailed the S&P 500’s 9.9% 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 best left ignored.
Allient (ALNT)
Market Cap: $910.7 million
Founded in 1962, Allient (NASDAQ:ALNT) develops and manufactures precision and specialty-controlled motion components and systems.
Why Are We Cautious About ALNT?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.2% annually over the last two years
- Performance over the past two years was negatively impacted by new share issuances as its earnings per share dropped by 5.7% annually, worse than its revenue
- ROIC of 8.1% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
At $53.28 per share, Allient trades at 22x forward P/E. To fully understand why you should be careful with ALNT, check out our full research report (it’s free for active Edge members).
Mercury Systems (MRCY)
Market Cap: $4.39 billion
Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Why Do We Steer Clear of MRCY?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Efficiency has decreased over the last five years as its operating margin fell by 7.6 percentage points
- Issuance of new shares over the last five years caused its earnings per share to fall by 18.3% annually while its revenue grew
Mercury Systems’s stock price of $73.01 implies a valuation ratio of 73.5x forward P/E. Check out our free in-depth research report to learn more about why MRCY doesn’t pass our bar.
Lennar (LEN)
Market Cap: $25.15 billion
One of the largest homebuilders in America, Lennar (NYSE:LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.
Why Should You Dump LEN?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 16.5% declines over the past two years
- 9.2 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
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Lennar is trading at $102.80 per share, or 15.3x forward P/E. Read our free research report to see why you should think twice about including LEN in your portfolio.
Stocks We Like More
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