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 is one cash-producing company that excels at turning cash into shareholder value and two that may struggle to keep up.

Two Stocks to Sell:

Karat Packaging (KRT)

Trailing 12-Month Free Cash Flow Margin: 4.9%

Founded as Lollicup, Karat Packaging (NASDAQ: KRT) distributes and manufactures environmentally-friendly disposable foodservice packaging solutions.

Why Does KRT Worry Us?

1. Muted 6.1% annual revenue growth over the last two years shows its demand lagged behind its industrials peers
2. Revenue growth over the past two years was nullified by the company’s new share issuances as its earnings per share fell by 9.4% annually
3. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.5% for the last five years

At $24.14 per share, Karat Packaging trades at 15.5x forward P/E. If you’re considering KRT for your portfolio, see our FREE research report to learn more.

Energy Recovery (ERII)

Trailing 12-Month Free Cash Flow Margin: 12.9%

Having saved far more than a trillion gallons of water, Energy Recovery (NASDAQ: ERII) provides energy recovery devices to the water treatment, oil and gas, and chemical processing sectors.

Why Does ERII Give Us Pause?

1. 2.6% annual revenue growth over the last two years was slower than its industrials peers
2. Sales are projected to tank by 10.3% over the next 12 months as demand evaporates
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Energy Recovery’s stock price of $10.63 implies a valuation ratio of 16.4x forward P/E. To fully understand why you should be careful with ERII, check out our full research report (it’s free).

One Stock to Watch:

Incyte (INCY)

Trailing 12-Month Free Cash Flow Margin: 26.3%

Founded in 1991 and evolving from a genomics research firm to a commercial-stage drug developer, Incyte (NASDAQ: INCY) is a biopharmaceutical company that discovers, develops, and commercializes proprietary therapeutics for cancer and inflammatory diseases.

Why Are We Positive On INCY?

1. Annual revenue growth of 18% over the past two years was outstanding, reflecting market share gains this cycle
2. Share buybacks catapulted its annual earnings per share growth to 75.7%, which outperformed its revenue gains over the last five years
3. Free cash flow margin increased by 7.3 percentage points over the last five years, giving the company more capital to invest or return to shareholders

Incyte is trading at $98.25 per share, or 13.4x forward P/E. Is now a good time to buy? See for yourself in our full research report, it’s free.

Stocks We Like Even More

ALSO WORTH WATCHING: Top 5 Momentum Stocks. The best time to own a great stock is when the market is finally noticing it. These aren't just high-quality businesses. Something is happening with them right now. Elite fundamentals meeting near-term momentum — both boxes checked at the same time.

Find out which stocks our AI platform is flagging this week. See this week's Strong Momentum stocks — FREE. Get Our Strong Momentum Stocks for Free HERE.

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today.