Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But their prominence also brings high exposure to the ups and downs of economic cycles. Luckily, their overall demand was steady over the past six months as the industry’s 16.2% return has closely followed the S&P 500.

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. Keeping that in mind, here are three industrials stocks we’re steering clear of.

Greenbrier (GBX)

Market Cap: $1.32 billion

Having designed the industry’s first double-decker railcar in the 1980s, Greenbrier (NYSE: GBX) supplies the freight rail transportation industry with railcars and related services.

Why Do We Think Twice About GBX?

1. Declining unit sales over the past two years show it’s struggled to increase its sales volumes and had to rely on price increases
2. Gross margin of 13.9% reflects its high production costs
3. Cash-burning history makes us doubt the long-term viability of its business model

Greenbrier’s stock price of $42.62 implies a valuation ratio of 4.6x forward EV-to-EBITDA. Check out our free in-depth research report to learn more about why GBX doesn’t pass our bar.

Heartland Express (HTLD)

Market Cap: $599.4 million

Founded by the son of a trucker, Heartland Express (NASDAQ: HTLD) offers full-truckload deliveries across the United States and Mexico.

Why Do We Avoid HTLD?

1. Annual sales declines of 14.2% for the past two years show its products and services struggled to connect with the market during this cycle
2. 12.7 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. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

At $7.75 per share, Heartland Express trades at 8.6x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than HTLD.

Global Industrial (GIC)

Market Cap: $1.04 billion

Formerly known as Systemax, Global Industrial (NYSE: GIC) distributes industrial and commercial products to businesses and institutions.

Why Should You Sell GIC?

1. 4.9% annual revenue growth over the last two years was slower than its industrials peers
2. Earnings per share fell by 1.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Global Industrial is trading at $27.00 per share, or 13.8x forward P/E. Read our free research report to see why you should think twice about including GIC in your portfolio.

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