While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here are three profitable companies to avoid and some better opportunities instead.

Bright Horizons (BFAM)

Trailing 12-Month GAAP Operating Margin: 10.2%

Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.

Why Do We Think BFAM Will Underperform?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Bright Horizons is trading at $118.04 per share, or 27.2x forward P/E. Dive into our free research report to see why there are better opportunities than BFAM.

Casella Waste Systems (CWST)

Trailing 12-Month GAAP Operating Margin: 3.8%

Starting with the founder picking up garbage with a pickup truck he purchased using savings from high school, Casella (NASDAQ: CWST) offers waste management services for businesses, residents, and the government.

Why Do We Think Twice About CWST?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Expenses have increased as a percentage of revenue over the last five years as its operating margin fell by 4.7 percentage points
3. ROIC of 6.1% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

Casella Waste Systems’s stock price of $98.63 implies a valuation ratio of 82.4x forward P/E. Read our free research report to see why you should think twice about including CWST in your portfolio.

SS&C (SSNC)

Trailing 12-Month GAAP Operating Margin: 22.9%

Founded in 1986 as a bridge between technology and financial services, SS&C Technologies (NASDAQ: SSNC) provides software and software-enabled services that help financial firms and healthcare organizations automate complex business processes.

Why Does SSNC Give Us Pause?

1. Earnings per share lagged its peers over the last five years as they only grew by 7.1% annually
2. Free cash flow margin shrank by 2.5 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $87.50 per share, SS&C trades at 14.3x forward P/E. If you’re considering SSNC for your portfolio, see our FREE research report to learn more.

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