The United States has some tremendous industrial companies. However, a company’s stature doesn’t mean its stock cannot be cyclical. In fact, industrial stocks are known for their cyclicality as they possess interlinkages with the economic cycle. As such, timing industrial stocks is critical if you want your investment portfolio to outperform the market.
Although yet to be consolidated, most believe the U.S. is heading for an interim economic decline. A better-than-expected July non-farm payrolls figure was recently revealed, concurrently softening market participants’ skepticism about the U.S. economy. However, factors such as rising unemployment, disinflation, and stock market volatility remain of concern.
Given the current economic climate, industrial stocks will likely face significant challenges. As a result, I’ve identified three industrial stocks to sell, which I believe are not only risky but also overvalued.
The Boeing Company (BA)
Boeing’s (NYSE:BA) stock has shed about 35% of its value since the turn of this year. Most of the company’s year-to-date headwinds are related to whistleblowing about its internal control processes.
Although I’m unsure about the optics of Boeing’s controversies, I’m uncomfortable investing in a stock with heightened litigation risk. Moreover, I anticipated a slowdown on Boeing’s demand side. What’s my basis? Well, the northern summer is coming to a close, and the uncertain economic environment might lead to a decline in consumer sentiment.
Furthermore, the company’s short-term financial performance is questionable. Boeing released its second-quarter results last month, communicating disappointing figures. For example, the company’s adjusted earnings per share fell short of estimates by about 89 cents. Additionally, Boeing’s debt load increased by $10 billion, reaching $57.9 billion. Although these variables are isolated observations, they are telling, especially as BA stock has a forward price-to-earnings ratio of 29.5x, which I consider high for a cyclical stock.
I’m bearish here, folks, and I think this is the first of the industrial stocks to sell.
Caterpillar (CAT)
I’m a big fan of Caterpillar’s (NYSE:CAT) products and stock alike. However, both might be heading for a cyclical retracement.
CAT stock has surged by nearly 20% year-over-year, though numerous inflection points have emerged. For example, Caterpillar revealed its second-quarter fiscal report last week, posting $16.69 billion in revenue, a 3.63% year-over-year decline. Although the company’s quarterly revenue surpassed estimates by $20.15 million, softening has occurred amid a decline in broad-based business confidence, indicating that Caterpillar might struggle to contend with a waning industrial cycle.
Furthermore, a glance at the firm’s other income statement line items shows an operating profit margin of 20.94% and a return on common equity (ROE) ratio of 62.17%. Not bad, right? I concede that Caterpillar’s baseline results are robust, but considering the company’s size, it might battle to adjust its cost base to accommodate its dwindling revenue growth. Therefore, a decline in profit margins won’t be surprising.
CAT stock has a forward price-to-earnings ratio of 15.94x, which, in isolation, isn’t bad. However, as previously mentioned, the economy has probably reached a cyclical peak, meaning forward price multiples might expand alongside the decline in nominal earnings growth rates. As such, I’m worried about this cyclical stock’s valuation outlook.
Some may disagree, but I think it is a suitable time to sell CAT stock as it has likely reached an interim peak.
United Rentals (URI)
For those unaware, United Rentals (NYSE:URI) is a U.S.-based equipment rental company. The company is a market leader and, therefore, deserves praise. Nevertheless, as with Boeing and Caterpillar, URI stock will likely succumb to cyclicality, making it the final of the industrial stocks to sell.
The baseline for my argument is exemplified by Baird’s recent remarks. The financial services provider communicated its bearish outlook of United Rentals’ stock by delivering an industry-wide opinion. According to Baird, “lower utilization and rental rate pressure are both dynamics likely to persist through 2024, potentially pressuring 2H24 core guidance,” illustrating my demand-side concerns.
Baird’s argument is an isolated observation. Nonetheless, I concur with its outlook as RI stock’s short-term variables coincide. For instance, United Rentals released its second-quarter earnings report in July, missing its revenue target by $10 million and defeating its earnings-per-share target by 19 cents. Although the firm experienced year-over-year growth of 6.2%, I think the industrial cycle will have an impact, eventually dragging United Rentals’ core growth downward.
Lastly, an observation of URI stock’s financial market-based variables.
URI stock has surged by more than 40% in the past twelve months, dragging its price-to-book and price-to-earnings ratios up to 5.5x and 15.75x, respectively. In my view, United Rentals’ price multiples have peaked. Moreover, as URI stock’s Put/Call ratio of 1.27x shows, options traders have turned bearish, implying that a pivot in URI’s stock price is probable.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.
