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. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.
Q2 Holdings (QTWO)
Trailing 12-Month Free Cash Flow Margin: 20.4%
With a platform powering digital services for approximately 25 million account holders across America, Q2 Holdings (NYSE:QTWO) provides cloud-based digital solutions that help financial institutions, fintechs, and alternative finance companies deliver modern banking experiences to their customers.
Why Does QTWO Fall Short?
- Average ARR growth of 12% over the last year has disappointed, suggesting it’s had a hard time winning long-term deals and renewals
- Anticipated sales growth of 11.2% for the next year implies demand will be shaky
- Gross margin of 52.6% is way below its competitors, leaving less money to invest in areas like marketing and R&D
Q2 Holdings is trading at $61.48 per share, or 5.2x forward price-to-sales. Read our free research report to see why you should think twice about including QTWO in your portfolio.
Central Garden & Pet (CENT)
Trailing 12-Month Free Cash Flow Margin: 10%
Enhancing the lives of both pets and homeowners, Central Garden & Pet (NASDAQ:CENT) is a leading producer and distributor of essential products for pet care, lawn and garden maintenance, and pest control.
Why Do We Pass on CENT?
- Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth
- Sales are projected to be flat over the next 12 months and imply weak demand
- Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its decreasing returns suggest its historical profit centers are aging
At $29.53 per share, Central Garden & Pet trades at 10.9x forward P/E. To fully understand why you should be careful with CENT, check out our full research report (it’s free for active Edge members).
GoodRx (GDRX)
Trailing 12-Month Free Cash Flow Margin: 23.7%
Started in 2011 to tackle the problem of high prescription drug costs in America, GoodRx (NASDAQ:GDRX) operates a digital platform that helps consumers find lower prices on prescription medications through price comparison tools and discount codes.
Why Should You Dump GDRX?
- Underwhelming customer growth over the past two years shows the company faced challenges in winning new contracts
- Revenue base of $799.9 million puts it at a disadvantage compared to larger competitors exhibiting economies of scale
- Negative returns on capital show that some of its growth strategies have backfired
GoodRx’s stock price of $4.19 implies a valuation ratio of 10.1x forward P/E. Dive into our free research report to see why there are better opportunities than GDRX.
Stocks We Like More
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