Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Their momentum is also rising as lower interest rates have incentivized higher capital spending. As a result, the industry has posted a 25.5% gain over the past six months, beating the S&P 500 by 7.8 percentage points.

Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. With that said, here are three industrials stocks that may face trouble.

Transcat (TRNS)

Market Cap: $712.1 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. Efficiency has decreased over the last five years as its operating margin fell by 1.7 percentage points
2. Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Transcat’s stock price of $76.41 implies a valuation ratio of 22.1x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including TRNS in your portfolio.

U-Haul (UHAL)

Market Cap: $10.6 billion

Founded by a husband and wife duo, U-Haul (NYSE: UHAL) is a provider of rental trucks and storage facilities.

Why Do We Avoid UHAL?

1. Sales were flat over the last two years, indicating it’s failed to expand 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. Limited cash reserves may force the company to seek unfavorable financing terms that could dilute shareholders

U-Haul is trading at $57.85 per share, or 1.9x trailing 12-month price-to-sales. To fully understand why you should be careful with UHAL, check out our full research report (it’s free).

Lennar (LEN)

Market Cap: $36.11 billion

One of the largest homebuilders in America, Lennar (NYSE: LEN) is known for constructing affordable, move-up, and retirement homes across a range of markets and communities.

Why Is LEN Risky?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 20.4% declines over the past two years
2. Earnings per share fell by 11.4% annually over the last two years while its revenue grew, showing its incremental sales were much less profitable
3. Free cash flow margin dropped by 13.5 percentage points over the last five years, implying the company became more capital intensive as competition picked up

At $140.67 per share, Lennar trades at 13.2x forward P/E. Check out our free in-depth research report to learn more about why LEN doesn’t pass our bar.

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