Even if a company is profitable, it doesn’t always mean it’s a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.

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.

Target (TGT)

Trailing 12-Month GAAP Operating Margin: 4.9%

With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE: TGT) serves the suburban consumer who is looking for a wide range of products under one roof.

Why Do We Pass on TGT?

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. Widely-available products (and therefore stiff competition) result in an inferior gross margin of 28% that must be offset through higher volumes
3. Poor expense management has led to an operating margin of 5.2% that is below the industry average

Target is trading at $106.23 per share, or 13.5x forward P/E. If you’re considering TGT for your portfolio, see our FREE research report to learn more.

AECOM (ACM)

Trailing 12-Month GAAP Operating Margin: 6.4%

Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE: ACM) provides various infrastructure consulting services.

Why Are We Wary of ACM?

1. Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 2.7% declines over the past two years
2. Estimated sales decline of 5.3% for the next 12 months implies a challenging demand environment
3. Operating margin of 4.7% falls short of the industry average, and the smaller profit dollars make it harder to react to unexpected market developments

AECOM’s stock price of $98.75 implies a valuation ratio of 18.7x forward P/E. Read our free research report to see why you should think twice about including ACM in your portfolio.

ScanSource (SCSC)

Trailing 12-Month GAAP Operating Margin: 3.3%

Operating as a crucial link in the technology supply chain since 1992, ScanSource (NASDAQ: SCSC) is a hybrid distributor that connects hardware, software, and cloud services from technology suppliers to resellers and business customers.

Why Should You Sell SCSC?

1. Sales tumbled by 11.1% annually over the last two years, showing market trends are working against its favor during this cycle
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 3.8% annually
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

At $40.45 per share, ScanSource trades at 9.2x forward P/E. Dive into our free research report to see why there are better opportunities than SCSC.

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