Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the market seems convinced that demand will slow. Due to this bearish outlook, the industry has tumbled by 6.6% over the past six months. This performance was disheartening since the S&P 500 held steady.

Some companies can grow regardless of the economic backdrop, but the odds aren’t great for the ones we’re analyzing today. With that said, here are three industrials stocks we’re swiping left on.

Builders FirstSource (BLDR)

Market Cap: $14.58 billion

Headquartered in Irving, TX, Builders FirstSource (NYSE:BLDR) is a construction materials manufacturer that offers a variety of lumber and lumber-related building products.

Why Are We Cautious About BLDR?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 15.1% annually over the last two years
2. Falling earnings per share over the last two years has some investors worried as stock prices ultimately follow EPS over the long term
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Builders FirstSource’s stock price of $128.42 implies a valuation ratio of 11.1x forward price-to-earnings. If you’re considering BLDR for your portfolio, see our FREE research report to learn more.

Kadant (KAI)

Market Cap: $4.01 billion

Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.

Why Does KAI Fall Short?

1. Sales are projected to remain flat over the next 12 months as demand decelerates from its two-year trend
2. Earnings growth underperformed the sector average over the last two years as its EPS grew by just 5.5% annually
3. Free cash flow margin didn’t grow over the last five years

At $339.31 per share, Kadant trades at 31x forward price-to-earnings. Check out our free in-depth research report to learn more about why KAI doesn’t pass our bar.

GXO Logistics (GXO)

Market Cap: $4.88 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. Earnings per share were flat over the last two years and fell short of the peer group average
3. High net-debt-to-EBITDA ratio of 6× could force the company to raise capital at unfavorable terms if market conditions deteriorate

GXO Logistics is trading at $40.62 per share, or 13.4x forward price-to-earnings. To fully understand why you should be careful with GXO, check out our full research report (it’s free).

Stocks We Like More

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