A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.
Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to avoid and some better opportunities instead.
Semtech (SMTC)
Trailing 12-Month Free Cash Flow Margin: 5.5%
A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.
Why Do We Steer Clear of SMTC?
- Persistent operating losses and eroding margin over the last five years point to its preference for growth over profits
- Increased cash burn over the last five years raises questions about the return timeline for its investments
- Negative returns on capital show that some of its growth strategies have backfired, and its falling returns suggest its earlier profit pools are drying up
Semtech’s stock price of $35 implies a valuation ratio of 20.8x forward P/E. Check out our free in-depth research report to learn more about why SMTC doesn’t pass our bar.
Victoria's Secret (VSCO)
Trailing 12-Month Free Cash Flow Margin: 4%
Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.
Why Are We Wary of VSCO?
- Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
- Estimated sales for the next 12 months are flat and imply a softer demand environment
- Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability
At $19.50 per share, Victoria's Secret trades at 6.9x forward P/E. If you’re considering VSCO for your portfolio, see our FREE research report to learn more.
Lovesac (LOVE)
Trailing 12-Month Free Cash Flow Margin: 2.6%
Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.
Why Does LOVE Worry Us?
- Muted 2.2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
- Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.5 percentage points
- Diminishing returns on capital suggest its earlier profit pools are drying up
Lovesac is trading at $21 per share, or 44.1x forward P/E. Dive into our free research report to see why there are better opportunities than LOVE.
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