3 Cash-Producing Stocks That Fall Short

Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.

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

Wayfair (W)

Trailing 12-Month Free Cash Flow Margin: 2.3%

Founded in 2002 by Niraj Shah, Wayfair (NYSE:W) is a leading online retailer of mass-market home goods in the US, UK, Canada, and Germany.

Why Are We Hesitant About W?

1. Intense competition is diverting traffic from its platform as its active customers fell by 1.8% annually
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 5.1%
3. Bad unit economics and steep infrastructure costs are reflected in its low gross margin of 30.2%

Wayfair is trading at $103.50 per share, or 16.8x forward EV/EBITDA. To fully understand why you should be careful with W, check out our full research report (it’s free for active Edge members).

Dollar Tree (DLTR)

Trailing 12-Month Free Cash Flow Margin: 5.8%

A treasure hunt because there’s no guarantee of consistent product selection, Dollar Tree (NASDAQ:DLTR) is a discount retailer that sells general merchandise and select packaged food at extremely low prices.

Why Does DLTR Give Us Pause?

1. Products aren't resonating with the market as its revenue declined by 1.1% annually over the last six years
2. Forecasted revenue decline of 8.9% for the upcoming 12 months implies demand will fall even further
3. Underwhelming 9.7% return on capital reflects management’s difficulties in finding profitable growth opportunities

Dollar Tree’s stock price of $98.35 implies a valuation ratio of 16.5x forward P/E. Dive into our free research report to see why there are better opportunities than DLTR.

Fiserv (FI)

Trailing 12-Month Free Cash Flow Margin: 22.5%

Powering over 1 billion accounts and processing more than 12,000 financial transactions per second globally, Fiserv (NYSE:FI) provides payment processing and financial technology solutions that enable merchants, banks, and credit unions to accept payments and manage financial transactions.

Why Are We Cautious About FI?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 6.1% for the last two years
2. Underwhelming 8.9% return on equity reflects management’s difficulties in finding profitable growth opportunities

At $65.09 per share, Fiserv trades at 6.3x forward P/E. Check out our free in-depth research report to learn more about why FI doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

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