Whether you see them or not, industrials businesses play a crucial part in our daily activities. Unfortunately, this role also comes with a demand profile tethered to the ebbs and flows of the broader economy, and investors seem to be forecasting a downturn - over the past six months, the industry has pulled back by 1.7%. This performance was disappointing since the S&P 500 climbed 5.3%.

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 steering clear of.

Clean Harbors (CLH)

Market Cap: $11.19 billion

Established in 1980, Clean Harbors (NYSE:CLH) provides environmental and industrial services like hazardous and non-hazardous waste disposal and emergency spill cleanups.

Why Are We Hesitant About CLH?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 1.9% annually
3. Free cash flow margin dropped by 2.3 percentage points over the last five years, implying the company became more capital intensive as competition picked up

Clean Harbors is trading at $207.79 per share, or 25.2x forward price-to-earnings. To fully understand why you should be careful with CLH, check out our full research report (it’s free).

EnerSys (ENS)

Market Cap: $3.90 billion

Supplying batteries that power equipment as big as mining rigs, EnerSys (NYSE:ENS) manufactures various kinds of batteries for a range of industries.

Why Do We Think Twice About ENS?

1. Declining unit sales over the past two years imply it may need to invest in improvements to get back on track
2. Gross margin of 25.3% is below its competitors, leaving less money to invest in areas like marketing and R&D
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 4.6 percentage points

EnerSys’s stock price of $101.04 implies a valuation ratio of 10.4x forward price-to-earnings. If you’re considering ENS for your portfolio, see our FREE research report to learn more.

MSC Industrial (MSM)

Market Cap: $4.38 billion

Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE:MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Why Are We Out on MSM?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Earnings per share fell by 3.2% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable

At $78.55 per share, MSC Industrial trades at 21x forward price-to-earnings. Read our free research report to see why you should think twice about including MSM in your portfolio, it’s free.

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