Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 22.1% for the sector - higher than the S&P 500’s 10.6% return.
Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here is one resilient industrials stock at the top of our wish list and two we’re swiping left on.
Two Industrials Stocks to Sell:
Regal Rexnord (RRX)
Market Cap: $10.5 billion
Headquartered in Milwaukee, Regal Rexnord (NYSE: RRX) provides power transmission and industrial automation products.
Why Are We Hesitant About RRX?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Flat earnings per share over the last two years underperformed the sector average
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its decreasing returns suggest its historical profit centers are aging
At $158.19 per share, Regal Rexnord trades at 14.9x forward P/E. To fully understand why you should be careful with RRX, check out our full research report (it’s free).
Commercial Vehicle Group (CVGI)
Market Cap: $60.23 million
Formed from a partnership between two distinct companies, CVG (NASDAQ: CVGI) offers various components used in vehicles and systems used in warehouses.
Why Should You Dump CVGI?
- Flat sales over the last five years suggest it must find different ways to grow during this cycle
- Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of -0.1% for the last five years
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Commercial Vehicle Group’s stock price of $1.76 implies a valuation ratio of 8.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CVGI in your portfolio.
One Industrials Stock to Buy:
Watts Water Technologies (WTS)
Market Cap: $9.90 billion
Founded in 1874, Watts Water (NYSE: WTS) specializes in manufacturing water products and systems for residential, commercial, and industrial applications globally.
Why Will WTS Outperform?
- 9.3% annual revenue growth over the last five years surpassed the sector average as its offerings resonated with customers
- Offerings are mission-critical for businesses and result in a best-in-class gross margin of 45.9%
- Performance over the past five years was turbocharged by share buybacks, which enabled its earnings per share to grow faster than its revenue
Watts Water Technologies is trading at $296.98 per share, or 26.3x forward P/E. Is now the time to initiate a position? Find out in our full research report, it’s free.
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