Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Floor And Decor (FND)
Trailing 12-Month Free Cash Flow Margin: 2.8%
Operating large, warehouse-style stores, Floor & Decor (NYSE: FND) is a specialty retailer that specializes in hard flooring surfaces for the home such as tiles, hardwood, stone, and laminates.
Why Are We Hesitant About FND?
- Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
- Smaller revenue base of $4.52 billion means it hasn’t achieved the economies of scale that some industry juggernauts enjoy
- Low returns on capital reflect management’s struggle to allocate funds effectively, and its falling returns suggest its earlier profit pools are drying up
Floor And Decor’s stock price of $73.80 implies a valuation ratio of 35.2x forward P/E. Read our free research report to see why you should think twice about including FND in your portfolio.
G-III (GIII)
Trailing 12-Month Free Cash Flow Margin: 10.4%
Founded as a small leather goods business, G-III (NASDAQ: GIII) is a fashion and apparel conglomerate with a diverse portfolio of brands.
Why Are We Out on GIII?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Projected sales decline of 1.3% for the next 12 months points to an even tougher demand environment ahead
- Low returns on capital reflect management’s struggle to allocate funds effectively
G-III is trading at $21.86 per share, or 5.6x forward P/E. Check out our free in-depth research report to learn more about why GIII doesn’t pass our bar.
CDW (CDW)
Trailing 12-Month Free Cash Flow Margin: 4.5%
Serving as a crucial bridge between technology manufacturers and end users since 1984, CDW (NASDAQ: CDW) is a multi-brand provider of information technology solutions that helps businesses and public sector organizations select, implement, and manage hardware, software, and IT services.
Why Do We Avoid CDW?
- Sales tumbled by 3.5% annually over the last two years, showing market trends are working against its favor during this cycle
- Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.1%
- Flat earnings per share over the last two years underperformed the sector average
At $170 per share, CDW trades at 17.4x forward P/E. To fully understand why you should be careful with CDW, check out our full research report (it’s free).
High-Quality Stocks for All Market Conditions
The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.
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