Even if they go mostly unnoticed, industrial businesses are the backbone of our country. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy. The market seems to be debating where we are in the cycle as the industrials stocks were flat over the past six months. At the same time, the S&P 500 rose by 3.6%.

Investors should tread carefully as timing cyclical companies is a challenging task, and any misstep can have you catching a falling knife. On that note, here are three industrials stocks we’re passing on.

nLIGHT (LASR)

Market Cap: $454.5 million

Founded by a former CEO and Harvard-educated entrepreneur Scott Keeneyn, nLIGHT (NASDAQ:LASR) offers semiconductor and fiber lasers to the industrial, aerospace & defense, and medical sectors.

Why Do We Think LASR Will Underperform?

1. Annual sales declines of 9.4% for the past two years show its products and services struggled to connect with the market during this cycle
2. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

nLIGHT is trading at $9.29 per share, or 2.1x forward price-to-sales. Read our free research report to see why you should think twice about including LASR in your portfolio, it’s free.

Kratos (KTOS)

Market Cap: $4.17 billion

Established with a commitment to supporting national security, Kratos (NASDAQ:KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.

Why Are We Wary of KTOS?

1. Cash burn has widened over the last five years, making us question whether it can reliably generate shareholder value
2. ROIC of 3.8% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

At $27.68 per share, Kratos trades at 47.2x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than KTOS.

3D Systems (DDD)

Market Cap: $398.7 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. Customers postponed purchases of its products and services this cycle as its revenue declined by 7.2% annually over the last five years
2. Free cash flow margin shrank by 9.1 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution

3D Systems’s stock price of $2.88 implies a valuation ratio of 0.9x forward price-to-sales. To fully understand why you should be careful with DDD, check out our full research report (it’s free).

Stocks We Like More

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.