Whether you see them or not, industrials businesses play a crucial part in our daily activities. 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 11.7% for the sector - higher than the S&P 500’s 6.2% return.

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

APi (APG)

Market Cap: $14.73 billion

Started in 1926 as an insulation contractor, APi (NYSE: APG) provides life safety solutions and specialty services for buildings and infrastructure.

Why Does APG Worry Us?

1. Muted 4.2% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $35.42 per share, APi trades at 23.8x forward P/E. To fully understand why you should be careful with APG, check out our full research report (it’s free).

Applied Industrial (AIT)

Market Cap: $9.91 billion

Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE: AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.

Why Are We Hesitant About AIT?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Projected sales growth of 6.2% for the next 12 months suggests sluggish demand
3. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 7% annually

Applied Industrial’s stock price of $262.46 implies a valuation ratio of 24.6x forward P/E. Read our free research report to see why you should think twice about including AIT in your portfolio.

AAR (AIR)

Market Cap: $2.54 billion

The first third-party MRO approved by the FAA for Safety Management System Requirements, AAR (NYSE: AIR) is a provider of aircraft maintenance services

Why Is AIR Not Exciting?

1. 6.1% annual revenue growth over the last five years was slower than its industrials peers
2. 5.6 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
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging

AAR is trading at $72.50 per share, or 15.9x forward P/E. Check out our free in-depth research report to learn more about why AIR doesn’t pass our bar.

Stocks We Like More

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