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. That said, here are three cash-producing companies to avoid and some better opportunities instead.

Dillard's (DDS)

Trailing 12-Month Free Cash Flow Margin: 9.4%

With stores located largely in the Southern and Western US, Dillard’s (NYSE: DDS) is a department store chain that sells clothing, cosmetics, accessories, and home goods.

Why Does DDS Give Us Pause?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Projected sales decline of 2.1% for the next 12 months points to an even tougher demand environment ahead
3. Efficiency has decreased over the last year as its operating margin fell by 2.1 percentage points

Dillard's is trading at $413.23 per share, or 9.9x forward EV-to-EBITDA. If you’re considering DDS for your portfolio, see our FREE research report to learn more.

Watsco (WSO)

Trailing 12-Month Free Cash Flow Margin: 6.1%

Originally a manufacturing company, Watsco (NYSE: WSO) today only distributes air conditioning, heating, and refrigeration equipment, as well as related parts and supplies.

Why Are We Hesitant About WSO?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Earnings per share fell by 4.1% annually over the last two years while its revenue grew, partly because it diluted shareholders
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Watsco’s stock price of $434.43 implies a valuation ratio of 29x forward P/E. Check out our free in-depth research report to learn more about why WSO doesn’t pass our bar.

LifeStance Health Group (LFST)

Trailing 12-Month Free Cash Flow Margin: 8%

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 Is LFST Not Exciting?

1. Modest revenue base of $1.28 billion gives it less fixed cost leverage and fewer distribution channels than larger companies
2. Cash burn makes us question whether it can achieve sustainable long-term growth
3. Negative returns on capital show that some of its growth strategies have backfired

At $5.09 per share, LifeStance Health Group trades at 67.2x forward P/E. Dive into our free research report to see why there are better opportunities than LFST.

Stocks We Like More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today