Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 9.8% for the sector - higher than the S&P 500’s 4.8% return.
Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. On that note, here are three industrials stocks best left ignored.
Quanex (NX)
Market Cap: $789.1 million
Starting in the seamless tube industry, Quanex (NYSE: NX) manufactures building products like window, door, kitchen, and bath cabinet components.
Why Are We Wary of NX?
- Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 17.6 percentage points
- Earnings per share fell by 12.6% annually over the last two years while its revenue grew, partly because it diluted shareholders
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
Quanex’s stock price of $17.36 implies a valuation ratio of 8.7x forward P/E. To fully understand why you should be careful with NX, check out our full research report (it’s free).
ChargePoint (CHPT)
Market Cap: $137.7 million
The most prominent EV charging company during the COVID bull market, ChargePoint (NYSE: CHPT) is a provider of electric vehicle charging technology solutions in North America and Europe.
Why Does CHPT Worry Us?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 9.9% annually over the last two years
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Negative earnings profile makes it challenging to secure favorable financing terms from lenders
ChargePoint is trading at $5.91 per share, or 0.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than CHPT.
Methode Electronics (MEI)
Market Cap: $236 million
Founded in 1946, Methode Electronics (NYSE: MEI) is a global supplier of custom-engineered solutions for Original Equipment Manufacturers (OEMs).
Why Do We Steer Clear of MEI?
- Sales were flat over the last five years, indicating it’s failed to expand this cycle
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
- High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
At $6.58 per share, Methode Electronics trades at 94.4x forward P/E. Read our free research report to see why you should think twice about including MEI in your portfolio.
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