Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and the industry is currently lagging as its six-month return of 2.8% has trailed the S&P 500’s 8.1% gain.

A cautious approach is imperative when dabbling in these companies as the losers can be left for dead when the cycle naturally turns and the winners consolidate. On that note, here are three industrials stocks we’re passing on.

Hillman (HLMN)

Market Cap: $1.93 billion

Established when Max Hillman purchased a franchise operation, Hillman (NASDAQ:HLMN) designs, manufactures, and sells industrial equipment and systems for various sectors.

Why Are We Wary of HLMN?

1. Sales stagnated over the last two years and signal the need for new growth strategies
2. Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Hillman’s stock price of $9.89 implies a valuation ratio of 17.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than HLMN.

AAR (AIR)

Market Cap: $2.29 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 Does AIR Worry Us?

1. Sales trends were unexciting over the last five years as its 3.2% annual growth was below the typical industrials company
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 1.1% for the last five years
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $64.52 per share, AAR trades at 15.9x forward price-to-earnings. To fully understand why you should be careful with AIR, check out our full research report (it’s free).

Hub Group (HUBG)

Market Cap: $2.53 billion

Started with $10,000, Hub Group (NASDAQ:HUBG) is a provider of intermodal, truck brokerage, and logistics services, facilitating transportation solutions for businesses worldwide.

Why Do We Think HUBG Will Underperform?

1. Declining unit sales over the past two years indicate demand is soft and that the company may need to revise its strategy
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 12.9%
3. Earnings per share have contracted by 43.4% annually over the last two years, a headwind for returns as stock prices often echo long-term EPS performance

Hub Group is trading at $41.67 per share, or 17.8x forward price-to-earnings. Check out our free in-depth research report to learn more about why HUBG doesn’t pass our bar.

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