The market has sustained a prolonged rally in recent months, supported by optimism and improving economic indicators like robust consumer spending. However, in recent days we have seen a shift as many overvalued stocks have started pulling back, with investors increasingly favoring value over high-flyers. This applies to industrial stocks, too.
The industrial sector, while not rallying as significantly as the broader market, has not been immune to this exuberance. Several industrial stocks have seen their share prices soar to unsustainable levels, driven more by market momentum than by underlying fundamentals.
In particular, the three industrial stocks on this list have become overvalued and are ripe for selling given their current levels. With the ongoing rotation from growth to value, investors would be wise to reassess their positions in these names. In fact, given how rapid this change in sentiment has been lately, I believe it is better to divest from these stocks by the end of this month to ensure a timely exit.
Wabtec Corp. (WAB)
![Westinghouse Air Brake Technologies Corporation (Wabtec) logo on a phone screen in front of the Wabtec website. WAB stock.](https://investorplace.com/wp-content/uploads/2022/06/wab-1600-300x169.png)
The first overvalued industrial stock that investors are likely to be better off exiting from at its current price is Wabtec Corp. (NYSE:WAB), also known as Westinghouse Air Brake Technologies Corporation. The company is a leading provider of equipment, systems and services for the rail industry. It is generally known for its innovative solutions that play a critical role in improving the efficiency and safety of rail transportation.
For example, Wabtec’s Positive Train Control systems are widely adopted, ensuring rail safety by preventing collisions and derailments. Organic growth, smart mergers and acquisitions (such as the merger with GE Transportation in 2019) and its strong presence in both freight and transit sectors have driven substantial growth over the years. Wabtec’s sales and earnings per share (EPS), in particular, have grown at a compound annual growth rate (CAGR) of 17.3% and 8.2% over the past decade, respectively.
Wabtec is well-positioned to capitalize on long-term trends in urbanization and the increasing demand for greener, more efficient transportation solutions which should sustain the demand for its products and services. However, the stock has surged by 49% over the past year and is currently trading at a forward price-to-earnings ratio (P/E) of 22.7. This appears to be a substantial multiple for a company vulnerable to market cyclicality and high interest rates. Therefore, it seems prudent to lock in some gains and consider exiting Wabtec at its current levels.
Exponent (EXPO)
![A photo of three people sitting around one end of a table, looking at a laptop screen.](https://investorplace.com/wp-content/uploads/2022/07/engineering_1600-300x169.jpg)
Most investors are not familiar with Exponent (NASDAQ:EXPO). However, Exponent is a leading engineering and scientific consulting firm recognized for its exceptional analysis and problem-solving capabilities. The company assists clients in various sectors, providing critical services like product safety assessments and failure analysis. For instance, Exponent played a key role in investigating the 2010 Deepwater Horizon oil spill, offering insights that helped improve safety protocols in the oil and gas industry.
Exponent’s growth has been fueled by its strong reputation for technical excellence and its ability to attract top-tier talent. Its diverse expertise has allowed Exponent to take on hard challenges, from assessing medical device safety to studying structural failures in buildings and bridges. With several industries facing a growing number of technical and regulatory complexities, Exponent has sustained revenues and EPS CAGRs of 7% and 7.8% over the past decade.
While its growth trajectory is commendable, Exponent’s stock appears overvalued at current levels. At a forward price-to-sales ratio (P/S) of 10.5 and a forward P/E of 54.7, it’s hard to justify holding the stock. Its low-double-digit growth is solid and should continue, but there don’t seem to be enough growth catalysts on the horizon that would justify the current valuation multiples. Essentially, the stock offers little to no margin of safety today.
Heico Corporation (HEI)
![graphic of magnifying glass zooming in on Hawaiian Electric Industries (HE) webpage](https://investorplace.com/wp-content/uploads/2021/05/hei-hawaiian-electric-he-1600-300x169.jpg)
Another one of the industrial stocks that seems to have outpaced its fundamentals is Heico Corporation (NYSE:HEI), a leading aerospace and defense company specializing in manufacturing and repairing crucial aircraft components. These include jet engine parts and avionics systems for Boeing (NYSE:BA) and Airbus (OTCMKTS:EADSY), among other clients.
Heico has sustained strong growth over the years, driven by its focus on niche markets and reputation for high-quality, cost-effective solutions. Heico also benefits from the current volatile geopolitical environment including the ongoing war in Ukraine and instability in the Middle East which are fueling defense budgets. For context, Heico’s revenues and EPS have grown at CAGRs of 10.8% and 8.9% over the past five years.
Heico is undoubtedly a high-quality operator. The issue with the stock today, however, is that its shares have surged by a considerable 27% year-to-date (YTD) and may have thus entered overvalued territory. Currently trading at over 51x its forward EPS, Heico appears to be too pricey, even if we assume that it sustains strong, high-teens growth over the medium term. The recent rally could offer investors a favorable opportunity to exit the stock now.
On the date of publication, Nikolaos Sismanis 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 hold (either directly or indirectly) any positions in the securities mentioned in this article.