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 18.1% gain over the past six months, beating the S&P 500 by 8.9 percentage points.

Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here are three industrials stocks that may face trouble.

Oshkosh (OSK)

Market Cap: $9.16 billion

Oshkosh (NYSE: OSK) manufactures specialty vehicles for the defense, fire, emergency, and commercial industry, operating various brand subsidiaries within each industry.

Why Do We Think Twice About OSK?

1. Average backlog growth of 1.3% over the past two years was mediocre and suggests fewer customers signed long-term contracts
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 16.4%
3. 7.3 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

Oshkosh is trading at $142.65 per share, or 12.7x forward P/E. Check out our free in-depth research report to learn more about why OSK doesn’t pass our bar.

Insteel (IIIN)

Market Cap: $750.2 million

Growing from a small wire manufacturer to one of the largest in the U.S., Insteel (NYSE: IIIN) provides steel wire reinforcing products for concrete.

Why Are We Wary of IIIN?

1. Sales tumbled by 7% annually over the last two years, showing market trends are working against its favor during this cycle
2. Sales were less profitable over the last two years as its earnings per share fell by 19.5% annually, worse than its revenue declines
3. Waning returns on capital imply its previous profit engines are losing steam

Insteel’s stock price of $38.65 implies a valuation ratio of 14.9x forward P/E. To fully understand why you should be careful with IIIN, check out our full research report (it’s free).

Helios (HLIO)

Market Cap: $1.82 billion

Founded on the principle of treating others as one wants to be treated, Helios (NYSE: HLIO) designs, manufactures, and sells motion and electronic control components for various sectors.

Why Do We Pass on HLIO?

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. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 2.9% annually
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $54.91 per share, Helios trades at 25.5x forward EV-to-EBITDA. If you’re considering HLIO for your portfolio, see our FREE research report to learn more.

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