Macroeconomic headwinds, characterized by a weak global economic outlook, particularly in China, and soft commodity prices, continue to cloud the near- to medium-term outlook of industrial stocks. The International Monetary Fund (“IMF”) has reduced its 2015 growth projection for the global economy by 20 basis points to 3.3%, while anticipating 3.8% growth in 2016.

Roughly 87% of total 23 Industrial stocks in the S&P 500 group presently carry a “Hold” or “Sell” investment ranking, with majority having yielded negative year-to-date returns. Investment in these stocks has been influenced by certain factors over the past few quarters, while the recent report by the world’s largest construction and mining equipment manufacturer Caterpillar Inc. CAT has further aggravated the problem.

Caterpillar Report — A Warning?

The $40-billion equipment maker lowered its revenue outlook for 2015 to $48 billion from the earlier projection of $49 billion. Also, the company anticipates its 2016 revenues to fall 5% from the 2015 tally.

In addition, Caterpillar initiated certain restructuring and cost-saving actions to align its business with current demand as well as to absorb the negatives arising from global uncertainties.    The company has decided to reduce its workforce by 4000−5000 by the end of 2016, while expecting to reduce employee strength by more than 10,000 by 2018. Also, factory consolidations will be prioritized, impacting as many as 20 factories worldwide. Once fully implemented, these initiatives are likely to lower Caterpillar’s expenses by $1.5 billion annually.

Caterpillar cited that global uncertainties have hurt its businesses in Energy & Transportation, Construction and Resource end markets. Demand for equipment has fallen sharply as fluctuating currency movements and uncertain global growth has negatively impacted export orders. To add to the woes, weak oil prices have restricted oil and gas drilling activities in the country, thus curtailing the capital expenditure for purchase of machinery and equipment.

The company anticipates no respite from the difficult operating conditions in the near future. As per reports of the Federal Reserve, industrial production in the U.S declined 0.4% sequentially in last August due to fall of 0.5% in manufacturing and 0.6% in mining outputs. For second-quarter 2015, industrial production had declined 1.4% year over year.

Another matter of concern is the weakening export demand for the U.S.-manufactured machinery. As per the U.S. Census Bureau report, machinery shipments declined 1.4% year over year in the first eight months of 2015. New orders were down 8.3%, while order backlog decreased 8.7%.

5 Industrial Stocks to Avoid

Caterpillar’s bleak prospects have not only disappointed investors and the market at large, but also made them cautious about any future investments in industrial stocks. The company’s share price fell nearly 6.3% on Sep 24, plunging to a new 52-week low of $64.65 during the trading session. Further sell-off of the company’s shares or that of other industrial stocks will not come as a surprise.

5 industrial stocks that would be wise to ignore in the near term are briefly discussed below.

Deere & Company DE: The $24.9-billion enterprise is engaged in worldwide production and distribution of agricultural and forestry equipment, construction equipment and engines. The company is highly vulnerable to global economic conditions, like lower energy and commodity prices, constricting credit conditions and uncertainty in some major economies. Anticipating weak demand, the company projects its equipment sales to decline 21% year over year in fiscal 2015 (ending Oct 31).

The company’s share price declined roughly 2.5% yesterday, while having yielded a negative return of 13.2% so far in calendar year 2015. Also, the company has an Earnings ESP of -1.35% for fourth-quarter fiscal 2015 and carries a Zacks Rank #4 (Sell), making the stock unsuitable for investment in the near term.

Joy Global, Inc. JOY: The $1.5-billion company manufactures surface and underground mining equipment for extraction of coal, copper, iron ore, oil sands, gold and other mineral resources. The company has cut its fiscal 2015 sales and earnings per share projections based on weak demand for its products and services due to global worries, including lower oil and commodity prices.

Since the beginning of calendar year 2015, the company’s share price has fallen 65.9%, declining over 1% as a reaction to Caterpillar’s report. The company currently has a low investment value of Zacks Rank #5 (Strong Sell).

Terex Corporation TEX: This $1.9-billion company manufactures equipment for the construction, infrastructure, and surface mining industries. The company has already trimmed its 2015 projections for earnings per share and sales due to lower commodity prices, adverse foreign currency movements and pricing pressure from rivals.

The company’s share price fell 5.5% yesterday, reaching a new 52-week low of $16.64 during the trading session. Year to date, the firm has yielded a negative return of 39.2%, and currently carries a Zacks Rank #5.

H&E Equipment Services Inc. HEES: The company offers heavy construction and industrial equipment for rent to the industrial and commercial firms, construction contractors, manufacturers, public utilities, municipalities, and maintenance contractors, as well as other industrial accounts. Weakness in the oil and gas markets as well as global uncertainties forced the company to lower its guidance for sales and earnings per share for 2015.

The company’s share price fell 2.3% following the release of Caterpillar’s report. Year to date, the company has yielded a negative 37.7% return. Currently, it carries a Zacks Rank #4.  

The Manitowoc Company, Inc. MTW: This $2.1-billion firm manufactures capital equipment for use in energy, petrochemical, industrial, infrastructure and other end markets. Taking into account the ongoing global uncertainties, the company has lowered its 2015 revenue outlook. The firm yielded a negative year-to-date return of 30.3%, while its share price fell 0.8% on Sep 24. The stock currently carries a Zacks Rank #5.

Conclusion

We believe the much-needed improvement in the economy as a whole, and the machinery industry can only be achieved with the help of effective governmental policies, huge infrastructural investments, job growth and emphasis on trade relations. Until the uncertainties in the global economy recede, it is wise to avoid gaining exposure in the above-mentioned stocks.