3 Cash-Producing Stocks with Questionable Fundamentals

A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Gap (GAP)

Trailing 12-Month Free Cash Flow Margin: 5.1%

Operating under the Gap, Old Navy, Banana Republic, and Athleta brands, Gap (NYSE:GAP) is an apparel and accessories retailer selling casual clothing to men, women, and children.

Why Does GAP Fall Short?

1. Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
2. Free cash flow margin shrank by 2.7 percentage points over the last year, suggesting the company is consuming more capital to stay competitive
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Gap is trading at $22.40 per share, or 11x forward P/E. To fully understand why you should be careful with GAP, check out our full research report (it’s free).

PVH (PVH)

Trailing 12-Month Free Cash Flow Margin: 5.9%

Founded in 1881 by a husband and wife duo, PVH (NYSE:PVH) is a global fashion conglomerate with iconic brands like Calvin Klein and Tommy Hilfiger.

Why Do We Avoid PVH?

1. Constant currency revenue growth has disappointed over the past two years and shows demand was soft
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.5%
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

At $86.53 per share, PVH trades at 7.3x forward P/E. Check out our free in-depth research report to learn more about why PVH doesn’t pass our bar.

Golden Entertainment (GDEN)

Trailing 12-Month Free Cash Flow Margin: 7.6%

Founded in 2001, Golden Entertainment (NASDAQ:GDEN) is a gaming company operating casinos, taverns, and distributed gaming platforms.

Why Does GDEN Give Us Pause?

1. Annual revenue declines of 3.3% over the last five years indicate problems with its market positioning
2. Demand will likely be weak over the next 12 months as Wall Street expects flat revenue
3. Poor free cash flow margin of 3.3% for the last two years limits its freedom to invest in growth initiatives, execute share buybacks, or pay dividends

Golden Entertainment’s stock price of $24.57 implies a valuation ratio of 31.7x forward P/E. Read our free research report to see why you should think twice about including GDEN in your portfolio.

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