Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 17.5% gain over the past six months, beating the S&P 500 by 10.4 percentage points.
Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. On that note, here are three industrials stocks we’re steering clear of.
WillScot Mobile Mini (WSC)
Market Cap: $5.09 billion
Originally focusing on mobile offices for construction sites, WillScot (NASDAQ: WSC) provides ready-to-use temporary spaces, largely for longer-term lease.
Why Should You Dump WSC?
- Annual sales declines of 2.5% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 1.8% annually over the past five years, which is concerning because stock prices follow EPS over the long term
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
WillScot Mobile Mini is trading at $28.73 per share, or 20.5x forward P/E. Check out our free in-depth research report to learn more about why WSC doesn’t pass our bar.
Karat Packaging (KRT)
Market Cap: $560.4 million
Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.
Why Does KRT Give Us Pause?
- Earnings per share have contracted by 5.2% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance
Karat Packaging’s stock price of $28.12 implies a valuation ratio of 1.3x trailing 12-month price-to-sales. To fully understand why you should be careful with KRT, check out our full research report (it’s free).
Owens Corning (OC)
Market Cap: $9.80 billion
Credited with the discovery of fiberglass, Owens Corning (NYSE: OC) supplies building and construction materials to the United States and international markets.
Why Do We Think OC Will Underperform?
- Sales trends were unexciting over the last two years as its 2.5% annual growth was below the typical industrials company
- Earnings per share fell by 17% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
- Eroding returns on capital suggest its historical profit centers are aging
At $121.66 per share, Owens Corning trades at 11.8x forward P/E. Read our free research report to see why you should think twice about including OC in your portfolio.
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