3 Profitable Stocks That Fall Short

While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".

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.

Paychex (PAYX)

Trailing 12-Month GAAP Operating Margin: 37.1%

Once known as the go-to service for small business payroll needs, Paychex (NASDAQ:PAYX) provides payroll processing, HR services, employee benefits administration, and insurance solutions to small and medium-sized businesses.

Why Does PAYX Worry Us?

1. 8.7% annual revenue growth over the last five years was slower than its software peers
2. Expenses have increased as a percentage of revenue over the last year as its operating margin fell by 4.2 percentage points
3. Projected 3.9 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

At $109.06 per share, Paychex trades at 6.1x forward price-to-sales. Check out our free in-depth research report to learn more about why PAYX doesn’t pass our bar.

U.S. Physical Therapy (USPH)

Trailing 12-Month GAAP Operating Margin: 11.1%

With a nationwide footprint spanning 671 clinics across 42 states, U.S. Physical Therapy (NYSE:USPH) operates a network of outpatient physical therapy clinics and provides industrial injury prevention services to employers across the United States.

Why Does USPH Give Us Pause?

1. Subscale operations are evident in its revenue base of $758.7 million, meaning it has fewer distribution channels than its larger rivals
2. 8.6 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

U.S. Physical Therapy is trading at $78.93 per share, or 27.7x forward P/E. Dive into our free research report to see why there are better opportunities than USPH.

CoreCivic (CXW)

Trailing 12-Month GAAP Operating Margin: 9.6%

Originally founded in 1983 as the first private prison company in the United States, CoreCivic (NYSE:CXW) operates correctional facilities, detention centers, and residential reentry programs for government agencies across the United States.

Why Should You Sell CXW?

1. Demand for its offerings was relatively low as its number of average available beds has underwhelmed
2. Earnings growth underperformed the sector average over the last four years as its EPS grew by just 1.9% annually
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.2 percentage points

CoreCivic’s stock price of $19 implies a valuation ratio of 14.8x forward P/E. Read our free research report to see why you should think twice about including CXW in your portfolio.

High-Quality Stocks for All Market Conditions

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