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.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

Ruger (RGR)

Trailing 12-Month Free Cash Flow Margin: 7.9%

Founded in 1949, Ruger (NYSE: RGR) is an American manufacturer of firearms for the commercial sporting market.

Why Is RGR Risky?

1. Sales trends were unexciting over the last five years as its 1.4% annual growth was below the typical consumer discretionary company
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 6.9% for the last two years
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Ruger’s stock price of $32.87 implies a valuation ratio of 20.9x forward P/E. To fully understand why you should be careful with RGR, check out our full research report (it’s free for active Edge members).

The Real Brokerage (REAX)

Trailing 12-Month Free Cash Flow Margin: 3.8%

Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ: REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.

Why Do We Think REAX Will Underperform?

1. Poor expense management has led to operating margin losses
2. Performance over the past five years shows its incremental sales were much less profitable, as its earnings per share fell by 6.2% annually
3. Free cash flow margin is expected to remain in place over the coming year

The Real Brokerage is trading at $4.03 per share, or 11.8x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including REAX in your portfolio.

Knight-Swift Transportation (KNX)

Trailing 12-Month Free Cash Flow Margin: 3.4%

Covering 1.6 billion loaded miles in 2023 alone, Knight-Swift Transportation (NYSE: KNX) offers less-than-truckload and full truckload delivery services.

Why Should You Dump KNX?

1. Annual revenue growth of 3.7% over the last two years was below our standards for the industrials sector
2. 10.8 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $51.61 per share, Knight-Swift Transportation trades at 27.9x forward P/E. If you’re considering KNX for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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