2 industrials stocks to consider right now and 1 we avoid

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 11.7% over the past six months. This drop is a far cry from the S&P 500’s 9.1% ascent.

Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. Taking that into account, here are two industrials stocks we think can generate sustainable market-beating returns and one we would avoid.

One industrials stock to sell:

ChargePoint (CHPT)

Market Cap: $220.4 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 Are We Hesitant About CHPT?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 1% annually over the last two years

2. Negative free cash flow raises questions about the return timeline for its investments

3. Short cash runway increases the probability of a capital raise that dilutes existing shareholders

At $8.20 per share, ChargePoint trades at 0.5x forward price-to-sales. Check out our free in-depth research report to learn more about why CHPT doesn’t pass our bar.

Two industrials stocks to watch:

Lincoln Electric (LECO)

Market Cap: $14.34 billion

Headquartered in Ohio, Lincoln Electric (NASDAQ:LECO) manufactures and sells welding equipment for various industries.

Why Does LECO Catch Our Eye?

1. Excellent operating margin of 16.5% highlights the efficiency of its business model, and its operating leverage amplified its profits over the last five years

2. Free cash flow margin grew by 3.9 percentage points over the last five years, giving the company more chips to play with

3. ROIC punches in at 26.3%, illustrating management’s expertise in identifying profitable investments

Lincoln Electric is trading at $256.35 per share, or 22.1x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free.

First Solar (FSLR)

Market Cap: $18.79 billion

Headquartered in Arizona, First Solar (NASDAQ:FSLR) specializes in manufacturing solar panels and providing photovoltaic solar energy solutions.

Why Will FSLR Beat the Market?

1. Market share has increased this cycle as its 19.5% annual revenue growth over the last two years was exceptional

2. Free cash flow turned positive over the last five years, showing the company has crossed a key inflection point

3. Returns on capital are climbing as management makes more lucrative bets