Even if they go mostly unnoticed, industrial businesses are the backbone of our country. But this role also comes with a demand profile tethered to the ebbs and flows of the broader economy. Thankfully, industrial end markets were stable over the past six months as the industry’s 4.4% gain has nearly mirrored the S&P 500.

Regardless of these results, investors should tread carefully. The diversity of companies in this space means that not all are created equal or well-positioned for the inescapable downturn. On that note, here are three industrials stocks best left ignored.

Advanced Energy (AEIS)

Market Cap: $5.26 billion

Pioneering technologies for radio frequency power delivery, Advanced Energy (NASDAQ: AEIS) provides power supplies, thermal management systems, and measurement and control instruments for various manufacturing processes.

Why Do We Avoid AEIS?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 5.9% annually over the last two years
2. Earnings per share decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Advanced Energy’s stock price of $139.81 implies a valuation ratio of 25x forward P/E. To fully understand why you should be careful with AEIS, check out our full research report (it’s free).

Illinois Tool Works (ITW)

Market Cap: $75.06 billion

Founded by Byron Smith, an investor who held over 100 patents, Illinois Tool Works (NYSE: ITW) manufactures engineered components and specialized equipment for numerous industries.

Why Are We Cautious About ITW?

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. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 6.2% annually

Illinois Tool Works is trading at $257.51 per share, or 24x forward P/E. Check out our free in-depth research report to learn more about why ITW doesn’t pass our bar.

Allegion (ALLE)

Market Cap: $14.12 billion

Allegion plc (NYSE: ALLE) is a provider of security products and solutions that keep people and assets safe and secure in various environments.

Why Are We Hesitant About ALLE?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Free cash flow margin shrank by 2.7 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

At $164.49 per share, Allegion trades at 20.3x forward P/E. Read our free research report to see why you should think twice about including ALLE in your portfolio.

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