It's always a good idea to consider the downsides when buying stocks. That's not to say you shouldn't buy them -- just that when weighing those investments, you need to be aware of each one's downside risks as well as its upside potential. With that in mind, here's what investors should look out for when considering buying shares of Stanley Black & Decker (SWK -1.59%), WD-40 (WDFC -0.66%), Illinois Tool Works (ITW -1.43%),3M (MMM -0.66%), and Boeing (BA 1.51%) right now.
1. Stanley Black & Decker
Nothing has gone right for this maker of tools and outdoor products in 2022. Soaring costs for raw materials and transportation, a weakening consumer spending environment, and even poor weather hurt its sales volumes. That all led to a savage cut in full-year guidance, and disappointed investors have bid its shares steadily downward this year.
That said, management is taking action to cut costs by a whopping $2 billion within three years, and believes it can hit earnings of $7.25 per share in 2023. That has the stock trading today at 12.1 times its potential 2023 earnings. It's a compelling value proposition. Just be aware that companies often have to cut prices heavily when trying to reduce inventory. As such, Stanley could disappoint investors in the near term.
2.WD-40
Continuing with the theme of companies being hit by consumer spending weakness, one has to mention WD-40. Its sales declined 9% in its fiscal third quarter (which ended May 31), and its gross profit margin fell to 47.7%, compared to 53.1% in the same quarter last year. Meanwhile, its nine-month gross profit margin stands at 49.7%. For reference, management aims to lift margins back to 55%.
Given the significant slowdown in U.S. consumer spending that started over the summer, WD-40 may disappoint investors when it reports its fiscal fourth-quarter earnings in October. The Americas market accounts for around half of WD-40's sales. As such, it's unlikely to return to a 55% gross profit margin this year.
Data by YCharts
3. Illinois Tool Works
One of the best-run companies in the industrial sector, there's not a lot wrong with Illinois Tool Works. In fact, I think it's one of the best companies to buy, particularly given the general weakness in the stock market.
The "problem" is the stock's valuation. This year's Wall Street downturn hasn't been enough to take the stock down to a level when it's an attractive value proposition. The following chart looks at forward valuations for the company, and frankly, they do not look cheap. As a rough rule of thumb, a price-to-free-cash-flow multiple of around 20 and an enterprise-value-to-EBITDA ratio of 11 to 12 are, in my opinion, reasonable valuations for a mature industrial company. However, given the potential for disappointment -- Illinois Tool Works has several cyclical businesses whose prospects are tied to the economy -- and its valuation, the stock price looks high enough for now.
Data by YCharts
4. 3M
The industrial giant's stock price is down almost a third in 2022, and it's looking like a good value. However, the company's problems seem to be building. The company's legal problems over its combat arms earplugs are well documented, and there are ongoing health and environmental issues from the PFAS chemicals it produces.
However, its issues are not limited to legal matters. The company appears to be struggling to fully offset cost pressures and improve margins. Meanwhile, the planned spinoff of its healthcare business seems to be happening from a position of weakness rather than strength.
5. Boeing
There is a strong case for buying Boeing stock as a recovery play. Its end markets are improving, its backlog remains strong, and its main rival, Airbus, is also experiencing difficulties in ramping up aircraft production. As such, all Boeing has to do is execute better, and the stock could have significant upside potential. Moreover, Boeing's profit margins tend to expand as its aircraft production ramps.
Unfortunately, increasing production isn't easy in the current environment. As a result, there isn't going to be a quick fix for the headwinds holding Boeing back, and last month's news that it's pulling engines from some airplanes in its inventory to complete newer models and keep up with its production schedule highlights the company's ongoing supply chain issues. As such, those who invest in Boeing need to recognize the potential for challenging times in the near term before the company returns to its former glory.
