Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. They are also bound to benefit from a friendlier regulatory environment with the Trump administration, and this excitement has led to a six-month gain of 19.5% for the sector - higher than the S&P 500’s 11% return.

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. Keeping that in mind, here are three industrials stocks we’re passing on.

Old Dominion Freight Line (ODFL)

Market Cap: $47.53 billion

With its name deriving from the Commonwealth of Virginia’s nickname, Old Dominion (NASDAQ: ODFL) delivers less-than-truckload (LTL) and full-container load freight.

Why Does ODFL Give Us Pause?

1. Declining 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. Diminishing returns on capital suggest its earlier profit pools are drying up

Old Dominion Freight Line’s stock price of $227.39 implies a valuation ratio of 40.2x forward P/E. Check out our free in-depth research report to learn more about why ODFL doesn’t pass our bar.

Textron (TXT)

Market Cap: $15.58 billion

Listed on the NYSE in 1947, Textron (NYSE: TXT) provides products and services in the aerospace, defense, industrial, and finance sectors.

Why Are We Hesitant About TXT?

1. The company has faced growth challenges as its 4.9% annual revenue increases over the last two years fell short of other industrials companies
2. Estimated sales growth of 3.7% for the next 12 months is soft and implies weaker demand
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.4 percentage points

At $88.64 per share, Textron trades at 13.9x forward P/E. If you’re considering TXT for your portfolio, see our FREE research report to learn more.

General Dynamics (GD)

Market Cap: $91.59 billion

Creator of the famous M1 Abrahms tank, General Dynamics (NYSE: GD) develops aerospace, marine systems, combat systems, and information technology products.

Why Does GD Worry Us?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 6.9% over the last five years was below our standards for the industrials sector
2. Estimated sales growth of 3.8% for the next 12 months implies demand will slow from its two-year trend
3. 2.4 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

General Dynamics is trading at $339.04 per share, or 20.6x forward P/E. To fully understand why you should be careful with GD, check out our full research report (it’s free).

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