Even if they go mostly unnoticed, industrial businesses are the backbone of our country. 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 20.3% for the sector - higher than the S&P 500’s 11.3% return.

Nevertheless, investors must be mindful as the cycle can unexpectedly turn. When this inevitably happens, only the elite companies will survive and ultimately thrive. On that note, here are three industrials stocks we’re passing on.

LSI (LYTS)

Market Cap: $673.5 million

Enhancing commercial environments, LSI (NASDAQ: LYTS) provides lighting and display solutions for businesses and retailers.

Why Does LYTS Fall Short?

1. Sales trends were unexciting over the last two years as its 7.4% annual growth was below the typical industrials company
2. Estimated sales growth of 4.6% for the next 12 months implies demand will slow from its two-year trend
3. Performance over the past two years was negatively impacted by new share issuances as its earnings per share grew slower than its revenue

LSI is trading at $23.32 per share, or 21.2x forward P/E. Dive into our free research report to see why there are better opportunities than LYTS.

GXO Logistics (GXO)

Market Cap: $5.88 billion

With notable customers such as Nike and Apple, GXO (NYSE: GXO) manages outsourced supply chains and warehousing for various companies.

Why Does GXO Worry Us?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Performance over the past two years shows its incremental sales were much less profitable, as its earnings per share fell by 2.2% annually
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly

At $51.38 per share, GXO Logistics trades at 18.5x forward P/E. Read our free research report to see why you should think twice about including GXO in your portfolio.

Gates Industrial Corporation (GTES)

Market Cap: $6.68 billion

Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE: GTES) offers power transmission and fluid transfer equipment for various industries.

Why Are We Wary of GTES?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
2. Estimated sales growth of 4.8% for the next 12 months is soft and implies weaker demand
3. ROIC of 6.9% reflects management’s challenges in identifying attractive investment opportunities

Gates Industrial Corporation’s stock price of $25.93 implies a valuation ratio of 17x forward P/E. Dive into our free research report to see why there are better opportunities than GTES.

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