Investors are getting excited about the changing monetary policy outlook. Fed Chairman Jerome Powell recently signaled that interest rate cuts are likely coming as soon as September. In theory, this could be great news for industrial companies.
But we shouldn’t lose sight of why the Fed is starting to pivot on its monetary policy. Now Powell is seemingly nervous about a potential slowdown in the labor market while inflation concerns are moving to the back burner.
This suggests that economic risks could be starting to tilt to the downside. Which, in turn, could hammer industrial stocks tied to things such as the employment market, construction or trucking. It’s time to dump these three industrial stocks to sell before the current wave of enthusiasm dissipates.
United Rentals (URI)
United Rentals (NYSE:URI) is the world’s largest equipment rental company. It leases out both general industrial equipment and specialized tools for residential and commercial construction projects.
The company has been a classic roll-up, acquiring countless smaller peers over the years. URI has delivered investors tremendous results, with shares up 62% over the past year and over 558% over the past five years.
However, investors may be getting ahead of themselves. Baird recently warned that demand appears to be soft in the rental market this year.
Perhaps investors are speculating that upcoming interest rate cuts will reinvigorate demand for construction rental equipment. However, with the softening economy and tapped-out consumer spending, there’s an argument that rental demand will face more prolonged headwinds — thus putting URI stock at high risk after its huge run-up.
Old Dominion Freight Line (ODFL)
Old Dominion Freight Line (NASDAQ:ODFL) is one of the largest players in the less-than-truckload (LTL) freight industry. Investors have been drawn to the company’s strong management team and disciplined capital investment approach. ODFL stock has also popped recently on hopes of a turnaround in the industry’s outlook after the recent slump.
The company’s recent results do not justify such excitement, with its latest earnings report meeting expectations on earnings per share but falling slightly short on revenues. While management is optimistic that industry conditions are starting to “thaw,” overall volume levels remain soft. Evercore ISI also cut its outlook on Old Dominion Freight Line in June, citing worries about its profitability.
If ODFL stock were trading at a reasonable starting valuation, this sort of turnaround story could be an intriguing buy. But with the recent 20% pop, ODFL shares are now going for more than 35 times forward earnings. That’s a lofty price for a trucking company.
Cintas (CTAS)
Cintas (NASDAQ:CTAS) is a specialty industrial company focused on uniform rentals. It also rents out ancillary goods like first aid kids, mops, restroom supplies and other such items.
Cintas has achieved a large market share through a consistent mergers and acquisition strategy. By buying up more mom-and-pop rental companies in this market, Cintas has achieved a strong market share, offering its clients convenient and reliable service.
The issue here is with valuation. CTAS stock has rallied 52% over the past year and over 200% in the past five years. While Cintas has an attractive business model and well-run operations, it is hard for a firm like this to grow quickly enough to justify that sort of stock price run.
Shares are now trading for about 45 times forward earnings. That’s an awfully steep price for a company whose revenues are expected to grow at a mere 7% annualized rate over the next three years. Morningstar’s Matthew Young agrees that CTAS stock is dramatically overvalued. He believes shares are worth just $520 each, which represents a considerable downside from today’s $764 price.
On the date of publication, Ian Bezek did not have (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.