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 39.5% for the sector - higher than the S&P 500’s 25.5% 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. Taking that into account, here are three industrials stocks we’re steering clear of.
AeroVironment (AVAV)
Market Cap: $18.6 billion
Focused on the future of autonomous military combat, AeroVironment (NASDAQ: AVAV) specializes in advanced unmanned aircraft systems and electric vehicle charging solutions.
Why Are We Wary of AVAV?
- Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 9.4 percentage points
- 25.6 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
- Negative returns on capital show that some of its growth strategies have backfired
At $370.29 per share, AeroVironment trades at 87.6x forward P/E. Check out our free in-depth research report to learn more about why AVAV doesn’t pass our bar.
Littelfuse (LFUS)
Market Cap: $6.62 billion
The developer of the first blade-type automotive fuse, Littelfuse (NASDAQ: LFUS) provides electrical protection and control components for the automotive, industrial, electronics, and telecommunications industries.
Why Are We Cautious About LFUS?
- Products and services are facing significant end-market challenges during this cycle as sales have declined by 4.7% annually over the last two years
- Earnings per share have dipped by 17.5% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Littelfuse’s stock price of $267.15 implies a valuation ratio of 23.1x forward P/E. Read our free research report to see why you should think twice about including LFUS in your portfolio.
General Dynamics (GD)
Market Cap: $88.79 billion
Creator of the famous M1 Abrahms tank, General Dynamics (NYSE: GD) develops aerospace, marine systems, combat systems, and information technology products.
Why Does GD Give Us Pause?
- Backlog growth averaged a weak 2.1% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
- Estimated sales growth of 3.3% for the next 12 months implies demand will slow from its two-year trend
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 5.8% annually
General Dynamics is trading at $330.59 per share, or 20.9x forward P/E. To fully understand why you should be careful with GD, check out our full research report (it’s free for active Edge members).
Stocks We Like More
Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.
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