When Wall Street turns bearish on a stock, it’s worth paying attention. These calls stand out because analysts rarely issue grim ratings on companies for fear their firms will lose out in other business lines such as M&A advisory.
At StockStory, we look beyond the headlines with our independent analysis to determine whether these bearish calls are justified. Keeping that in mind, here are three stocks where the skepticism is well-placed and some better opportunities to consider.
Applied Industrial (AIT)
Consensus Price Target: $280.71 (2.5% implied return)
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Why Are We Cautious About AIT?
- Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
- Anticipated sales growth of 4.9% for the next year implies demand will be shaky
- Gross margin of 29.4% reflects its high production costs
At $274 per share, Applied Industrial trades at 25.6x forward P/E. Dive into our free research report to see why there are better opportunities than AIT.
Cummins (CMI)
Consensus Price Target: $359.56 (-1.1% implied return)
With more than half of the heavy-duty truck market using its engines at one point, Cummins (NYSE:CMI) offers engines and power systems.
Why Does CMI Give Us Pause?
- Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6% over the last two years was below our standards for the industrials sector
- Free cash flow margin shrank by 10.2 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
Cummins is trading at $363.41 per share, or 12.5x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including CMI in your portfolio.
Landstar (LSTR)
Consensus Price Target: $141.21 (6% implied return)
Covering billions of miles throughout North America, Landstar (NASDAQ:LSTR) is a transportation company specializing in freight and last-mile delivery services.
Why Do We Think LSTR Will Underperform?
- Customers postponed purchases of its products and services this cycle as its revenue declined by 12.7% annually over the last two years
- Earnings per share have dipped by 27.9% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Eroding returns on capital suggest its historical profit centers are aging
Landstar’s stock price of $133.27 implies a valuation ratio of 24x forward P/E. If you’re considering LSTR for your portfolio, see our FREE research report to learn more.
Stocks We Like More
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