Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the industry has underperformed the market over the past six months as its 2.6% return lagged the S&P 500 by 1.9 percentage points.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. With that said, here are three industrials stocks that may face trouble.

Bel Fuse (BELFA)

Market Cap: $1.20 billion

Founded by 26-year-old Elliot Bernstein during the electronics boom after WW2, Bel Fuse (NASDAQ: BELF.A) provides electronic systems and devices to the telecommunications, networking, transportation, and industrial sectors.

Why Are We Wary of BELFA?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 10% annually over the last two years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term

Bel Fuse’s stock price of $88.40 implies a valuation ratio of 9.2x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why BELFA doesn’t pass our bar.

Kratos (KTOS)

Market Cap: $7.63 billion

Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.

Why Are We Cautious About KTOS?

1. 7 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Kratos is trading at $45.37 per share, or 84.4x forward P/E. To fully understand why you should be careful with KTOS, check out our full research report (it’s free).

D.R. Horton (DHI)

Market Cap: $39.53 billion

One of the largest homebuilding companies in the U.S., D.R. Horton (NYSE: DHI) builds a variety of new construction homes across multiple markets.

Why Do We Think Twice About DHI?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 19.4% declines over the past two years
2. Earnings per share have dipped by 5.6% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Waning returns on capital imply its previous profit engines are losing steam

At $128.69 per share, D.R. Horton trades at 9.9x forward P/E. Dive into our free research report to see why there are better opportunities than DHI.

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