Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 6.2% over the past six months. This performance was discouraging since the S&P 500 stood firm.
Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. Taking that into account, here is one industrials stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Industrials Stocks to Sell:
Alamo (ALG)
Market Cap: $2.27 billion
Expanding its markets through acquisitions since its founding, Alamo (NSYE:ALG) designs, manufactures, and services vegetation management and infrastructure maintenance equipment for governmental, industrial, and agricultural use.
Why Are We Wary of ALG?
- Sales trends were unexciting over the last two years as its 3.7% annual growth was below the typical industrials company
- Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
- Free cash flow margin dropped by 4.9 percentage points over the last five years, implying the company became more capital intensive as competition picked up
Alamo’s stock price of $187.12 implies a valuation ratio of 17.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why ALG doesn’t pass our bar.
AeroVironment (AVAV)
Market Cap: $3.52 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ:AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Is AVAV Not Exciting?
- Efficiency has decreased over the last five years as its operating margin fell by 7.5 percentage points
- 24.6 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 from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
AeroVironment is trading at $125.94 per share, or 28x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than AVAV.
One Industrials Stock to Watch:
Energy Recovery (ERII)
Market Cap: $868.3 million
Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ:ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.
Why Is ERII on Our Radar?
- Market share has increased this cycle as its 10.8% annual revenue growth over the last five years was exceptional
- Superior product capabilities and pricing power result in a best-in-class gross margin of 69.7%
- Earnings per share grew by 23.4% annually over the last two years, massively outpacing its peers
At $15.81 per share, Energy Recovery trades at 22.9x forward price-to-earnings. Is now the right time to buy? Find out in our full research report, it’s free.
Stocks We Like Even More
The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.
Take advantage of the rebound by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.
Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Axon (+711% five-year return). Find your next big winner with StockStory today for free.