Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.

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

Okta (OKTA)

Trailing 12-Month GAAP Operating Margin: 3.9%

Named after the meteorological measurement for cloud cover, Okta (NASDAQ: OKTA) provides cloud-based identity management solutions that help organizations securely connect their employees, partners, and customers to the right applications and services.

Why Are We Hesitant About OKTA?

1. Products, pricing, or go-to-market strategy may need some adjustments as its 10.2% average billings growth over the last year was weak
2. Estimated sales growth of 9.2% for the next 12 months implies demand will slow from its two-year trend
3. Projected 3.8 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Okta is trading at $74.17 per share, or 4.7x forward price-to-sales. Check out our free in-depth research report to learn more about why OKTA doesn’t pass our bar.

Hershey (HSY)

Trailing 12-Month GAAP Operating Margin: 12.3%

Best known for its milk chocolate bar and Hershey's Kisses, Hershey (NYSE: HSY) is an iconic company known for its chocolate products.

Why Do We Think Twice About HSY?

1. Falling unit sales over the past two years indicate demand is soft and that the company may need to revise its product strategy
2. Costs have risen faster than its revenue over the last year, causing its operating margin to decline by 13.5 percentage points
3. Incremental sales over the last three years were much less profitable as its earnings per share fell by 9.5% annually while its revenue grew

At $221.77 per share, Hershey trades at 26.1x forward P/E. If you’re considering HSY for your portfolio, see our FREE research report to learn more.

Transcat (TRNS)

Trailing 12-Month GAAP Operating Margin: 5%

Serving the pharmaceutical, industrial manufacturing, energy, and chemical process industries, Transcat (NASDAQ: TRNS) provides measurement instruments and supplies.

Why Does TRNS Give Us Pause?

1. Efficiency has decreased over the last five years as its operating margin fell by 2.8 percentage points
2. Issuance of new shares over the last two years caused its earnings per share to fall by 6.8% annually while its revenue grew
3. Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned

Transcat’s stock price of $78.42 implies a valuation ratio of 36.8x forward P/E. To fully understand why you should be careful with TRNS, check out our full research report (it’s free).

Stocks We Like More

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