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 influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 15.4% over the past six months. This performance was worse than the S&P 500’s 7.1% loss.

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.

Boise Cascade (BCC)

Market Cap: $3.64 billion

Formed through the merger of two lumber companies, Boise Cascade Company (NYSE: BCC) manufactures and distributes wood products and other building materials.

Why Do We Steer Clear of BCC?

1. Customers postponed purchases of its products and services this cycle as its revenue declined by 10.5% annually over the last two years
2. Earnings per share have dipped by 33.4% annually over the past two years, which is concerning because stock prices follow EPS over the long term
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Boise Cascade is trading at $96.62 per share, or 9.4x forward price-to-earnings. If you’re considering BCC for your portfolio, see our FREE research report to learn more.

Graphic Packaging Holding (GPK)

Market Cap: $7.41 billion

Founded in 1991, Graphic Packaging (NYSE: GPK) is a provider of paper-based packaging solutions for a wide range of products.

Why Should You Dump GPK?

1. Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
2. Sales are expected to decline once again over the next 12 months as it continues working through a challenging demand environment
3. Free cash flow margin shrank by 7.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $24.91 per share, Graphic Packaging Holding trades at 9.2x forward price-to-earnings. Read our free research report to see why you should think twice about including GPK in your portfolio.

Meritage Homes (MTH)

Market Cap: $4.60 billion

Originally founded in 1985 in Arizona as Monterey Homes, Meritage Homes (NYSE: MTH) is a homebuilder specializing in designing and constructing energy-efficient and single-family homes in the US.

Why Do We Pass on MTH?

1. Demand cratered as it couldn’t win new orders over the past two years, leading to an average 39.1% decline in its backlog
2. Free cash flow margin shrank by 15.4 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Waning returns on capital imply its previous profit engines are losing steam

Meritage Homes’s stock price of $60.80 implies a valuation ratio of 6x forward price-to-earnings. To fully understand why you should be careful with MTH, check out our full research report (it’s free).

Stocks We Like More

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