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, the tide is turning in their favor as the industry’s 12.8% return over the past six months has topped the S&P 500 by 10.3 percentage points.

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. On that note, here are three industrials stocks we’re passing on.

Old Dominion Freight Line (ODFL)

Market Cap: $43.43 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 Worry Us?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 3.2% annually over the last two years
2. Earnings per share have dipped by 7.2% annually over the past two years, which is concerning because stock prices 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 $208.36 implies a valuation ratio of 41.3x forward P/E. Dive into our free research report to see why there are better opportunities than ODFL.

Global Industrial (GIC)

Market Cap: $1.27 billion

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

Why Is GIC Risky?

1. Sales trends were unexciting over the last two years as its 4% annual growth was below the typical industrials company
2. Flat earnings per share over the last two years lagged its peers
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Global Industrial is trading at $33.34 per share, or 16.9x forward P/E. Read our free research report to see why you should think twice about including GIC in your portfolio.

Arrow Electronics (ARW)

Market Cap: $8.08 billion

Founded as a single retail store, Arrow Electronics (NYSE: ARW) provides electronic components and enterprise computing solutions to businesses globally.

Why Do We Avoid ARW?

1. Sales tumbled by 3.5% annually over the last two years, showing market trends are working against its favor during this cycle
2. Sales were less profitable over the last two years as its earnings per share fell by 19.7% annually, worse than its revenue declines
3. Eroding returns on capital suggest its historical profit centers are aging

At $158.27 per share, Arrow Electronics trades at 12x forward P/E. To fully understand why you should be careful with ARW, check out our full research report (it’s free).

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