Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 13.1% gain over the past six months, beating the S&P 500 by 6.7 percentage points.

Although these companies have produced results lately, a cautious approach is imperative. When the cycle naturally turns, the losers can be left for dead while the winners consolidate and take more of the market. With that said, here are three industrials stocks we’re passing on.

Trex (TREX)

Market Cap: $6.58 billion

Addressing the demand for aesthetically-pleasing and unique outdoor living spaces, Trex Company (NYSE: TREX) makes wood-alternative decking, railing, and patio furniture.

Why Do We Think Twice About TREX?

1. Day-to-day expenses have swelled relative to revenue over the last five years as its operating margin fell by 3.3 percentage points
2. 5.4 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
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $61.95 per share, Trex trades at 25.5x forward P/E. Dive into our free research report to see why there are better opportunities than TREX.

FuelCell Energy (FCEL)

Market Cap: $90.71 million

Founded in 1969, FuelCell Energy (NASDAQ: FCEL) is a leading manufacturer and developer of carbonate fuel cell technology for stationary power generation.

Why Are We Hesitant About FCEL?

1. Backlog growth averaged a weak 6.2% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
2. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 31 percentage points
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

FuelCell Energy’s stock price of $4.02 implies a valuation ratio of 0.4x forward price-to-sales. If you’re considering FCEL for your portfolio, see our FREE research report to learn more.

LGI Homes (LGIH)

Market Cap: $1.43 billion

Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.

Why Should You Dump LGIH?

1. Demand cratered as it couldn’t win new orders over the past two years, leading to an average 10.4% decline in its backlog
2. Waning returns on capital imply its previous profit engines are losing steam
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

LGI Homes is trading at $61.27 per share, or 9.5x forward P/E. Check out our free in-depth research report to learn more about why LGIH doesn’t pass our bar.

Stocks We Like More

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