Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 4.1%.

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.

Transcat (TRNS)

Market Cap: $777.7 million

Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.

Why Does TRNS Give Us Pause?

1. Responsiveness to unforeseen market trends is restricted due to its substandard operating margin profitability
2. ROIC of 8.7% reflects management’s challenges in identifying attractive investment opportunities, and its falling returns suggest its earlier profit pools are drying up
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Transcat is trading at $83.46 per share, or 36.3x forward P/E. Read our free research report to see why you should think twice about including TRNS in your portfolio.

Watsco (WSO)

Market Cap: $17.7 billion

Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.

Why Are We Wary of WSO?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its stores
2. Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 4.1% annually
3. Waning returns on capital imply its previous profit engines are losing steam

At $472.42 per share, Watsco trades at 31.6x forward P/E. If you’re considering WSO for your portfolio, see our FREE research report to learn more.

Norfolk Southern (NSC)

Market Cap: $60.83 billion

Starting with a single route from Virginia to North Carolina, Norfolk Southern (NYSE: NSC) is a freight transportation company operating a major railroad network across the eastern United States.

Why Do We Steer Clear of NSC?

1. Underwhelming unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Free cash flow margin shrank by 10.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

Norfolk Southern’s stock price of $282.50 implies a valuation ratio of 20.5x forward P/E. Check out our free in-depth research report to learn more about why NSC doesn’t pass our bar.

Stocks We Like More

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