Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. 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 17.2% for the sector - higher than the S&P 500’s 8% 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. With that said, here are three industrials stocks that may face trouble.

Array (ARRY)

Market Cap: $1.21 billion

Going public in October 2020, Array (NASDAQ: ARRY) is a global manufacturer of ground-mounting tracking systems for utility and distributed generation solar energy projects.

Why Should You Dump ARRY?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.6% annually over the last two years
2. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
3. High net-debt-to-EBITDA ratio of 5× increases the risk of forced asset sales or dilutive financing if operational performance weakens

Array’s stock price of $7.87 implies a valuation ratio of 10.9x forward P/E. If you’re considering ARRY for your portfolio, see our FREE research report to learn more.

Rockwell Automation (ROK)

Market Cap: $50.26 billion

One of the first companies to address industrial automation, Rockwell Automation (NYSE: ROK) sells products that help customers extract more efficiency from their machinery.

Why Does ROK Worry Us?

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. Projected sales growth of 4% for the next 12 months suggests sluggish demand
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Rockwell Automation is trading at $452 per share, or 32.6x forward P/E. Check out our free in-depth research report to learn more about why ROK doesn’t pass our bar.

Generac (GNRC)

Market Cap: $15.65 billion

With its name deriving from a combination of “generating” and “AC”, Generac (NYSE: GNRC) offers generators and other power products for residential, industrial, and commercial use.

Why Are We Cautious About GNRC?

1. 3.7% annual revenue growth over the last two years was slower than its industrials peers
2. Earnings per share have contracted by 2.9% annually over the last five years, a headwind for returns as stock prices often echo long-term EPS performance
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $265.90 per share, Generac trades at 28.6x forward P/E. To fully understand why you should be careful with GNRC, check out our full research report (it’s free).

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