Whether you see them or not, industrials businesses play a crucial part in our daily activities. But they are at the whim of volatile macroeconomic factors that sway capital spending, like interest rates. Wariness surrounding these influences has caused the industry to underperform the market as it was flat over the past six months while the S&P 500 climbed by 5.2%.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks we’re steering clear of.

Karat Packaging (KRT)

Market Cap: $571 million

Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.

Why Is KRT Not Exciting?

1. 2.1% annual revenue growth over the last two years was slower than its industrials peers
2. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.9% annually
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 4.4% for the last five years

Karat Packaging is trading at $28.30 per share, or 10.4x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why KRT doesn’t pass our bar.

Masco (MAS)

Market Cap: $13.59 billion

Headquartered just outside of Detroit, MI, Masco (NYSE: MAS) designs and manufactures home-building products such as glass shower doors, decorative lighting, bathtubs, and faucets.

Why Is MAS Risky?

1. 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
2. Sales are projected to be flat over the next 12 months and imply weak demand
3. Waning returns on capital imply its previous profit engines are losing steam

Masco’s stock price of $64.44 implies a valuation ratio of 14.8x forward P/E. Read our free research report to see why you should think twice about including MAS in your portfolio.

Worthington (WOR)

Market Cap: $3.13 billion

Founded by a steel salesman, Worthington (NYSE: WOR) specializes in steel processing, pressure cylinders, and engineered cabs for commercial markets.

Why Do We Steer Clear of WOR?

1. Annual sales declines of 17.7% for the past five years show its products and services struggled to connect with the market during this cycle
2. Earnings per share have dipped by 27.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

At $62.80 per share, Worthington trades at 18.9x forward P/E. If you’re considering WOR for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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