While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.
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 avoid and some better opportunities instead.
GameStop (GME)
Trailing 12-Month Free Cash Flow Margin: 14.9%
Drawing gaming fans with demo units set up with the latest releases, GameStop (NYSE: GME) sells new and used video games, consoles, and accessories, as well as pop culture merchandise.
Why Do We Steer Clear of GME?
- GameStop’s brick-and-mortar engine keeps stalling as gamers migrate to digital downloads, and management is closing more outlets after shuttering hundreds of stores last year
- The share price remains an unpredictable meme-stock roller-coaster, and the purchase of thousands of Bitcoins have fueled huge swings
- On the bright side, the company has a large cash pile that gives CEO Ryan Cohen room to buy more Bitcoin or fund its collectibles and trading-card push
GameStop’s stock price of $23.69 implies a valuation ratio of 27.7x forward P/E. To fully understand why you should be careful with GME, check out our full research report (it’s free).
Teleflex (TFX)
Trailing 12-Month Free Cash Flow Margin: 8.4%
With a portfolio spanning from vascular access catheters to minimally invasive surgical tools, Teleflex (NYSE: TFX) designs, manufactures, and supplies single-use medical devices used in critical care and surgical procedures across hospitals worldwide.
Why Does TFX Fall Short?
- Weak constant currency growth over the past two years indicates challenges in maintaining its market share
- Free cash flow margin dropped by 12.1 percentage points over the last five years, implying the company became more capital intensive as competition picked up
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
At $103.75 per share, Teleflex trades at 7.1x forward P/E. Read our free research report to see why you should think twice about including TFX in your portfolio.
LifeStance Health Group (LFST)
Trailing 12-Month Free Cash Flow Margin: 8.7%
With over 6,600 licensed mental health professionals treating more than 880,000 patients annually, LifeStance Health (NASDAQ: LFST) provides outpatient mental health services through a network of clinicians offering psychiatric evaluations, psychological testing, and therapy across 33 states.
Why Does LFST Worry Us?
- Subscale operations are evident in its revenue base of $1.37 billion, meaning it has fewer distribution channels than its larger rivals
- Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital
- Negative returns on capital show management lost money while trying to expand the business
LifeStance Health Group is trading at $6.92 per share, or 30.5x forward P/E. To fully understand why you should be careful with LFST, check out our full research report (it’s free).
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