Yahoo Finance

Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Still, their generally high capital requirements expose them to the ups and downs of economic cycles, and the market seems to be baking in a prolonged downturn as the industry has shed 12.8% over the past six months. This drop was worse than the S&P 500’s 3.3% loss.

A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. With that said, here are three industrials stocks we’re steering clear of.

Oshkosh (OSK)

Market Cap: $6.29 billion

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

Why Does OSK Give Us Pause?

1. Sales pipeline suggests its future revenue growth may not meet our standards as its average backlog growth of 4% for the past two years was weak

2. Demand will likely fall over the next 12 months as Wall Street expects flat revenue

3. Free cash flow margin shrank by 9.9 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive

At $97.74 per share, Oshkosh trades at 9x forward P/E. To fully understand why you should be careful with OSK, check out our full research report (it’s free).

RTX (RTX)

Market Cap: $176.8 billion

Originally focused on refrigeration technology, Raytheon (NSYE:RTX) provides a a variety of products and services to the aerospace and defense industries.

Why Does RTX Fall Short?

1. Estimated sales growth of 4% for the next 12 months implies demand will slow from its two-year trend

2. Performance over the past five years was negatively impacted by new share issuances as its earnings per share were flat while its revenue grew

3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

RTX’s stock price of $132.04 implies a valuation ratio of 21.1x forward P/E. Read our free research report to see why you should think twice about including RTX in your portfolio, it’s free.

3D Systems (DDD)

Market Cap: $219.6 million

Founded by the inventor of stereolithography, 3D Systems (NYSE:DDD) engineers, manufactures, and sells 3D printers and other related products to the aerospace, automotive, healthcare, and consumer goods industries.

Why Should You Sell DDD?

1. Annual sales declines of 6.9% for the past five years show its products and services struggled to connect with the market during this cycle

2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders