3 Cash-Producing Stocks We Approach with Caution

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.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

MSC Industrial (MSM)

Trailing 12-Month Free Cash Flow Margin: 4.4%

Founded in NYC’s Little Italy, MSC Industrial Direct (NYSE:MSM) provides industrial supplies and equipment, offering vast and reliable selection for customers such as contractors

Why Do We Think MSM Will Underperform?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Earnings per share fell by 3.3% annually over the last five years while its revenue grew, showing its incremental sales were much less profitable
3. Waning returns on capital imply its previous profit engines are losing steam

At $84.76 per share, MSC Industrial trades at 19.6x forward P/E. To fully understand why you should be careful with MSM, check out our full research report (it’s free).

United Parcel Service (UPS)

Trailing 12-Month Free Cash Flow Margin: 4.9%

Trademarking its recognizable UPS Brown color, UPS (NYSE:UPS) offers package delivery, supply chain management, and freight forwarding services.

Why Do We Avoid UPS?

1. Declining unit sales over the past two years suggest it might have to lower prices to accelerate growth
2. Incremental sales over the last five years were less profitable as its earnings per share were flat while its revenue grew
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

United Parcel Service’s stock price of $106.95 implies a valuation ratio of 15.8x forward P/E. If you’re considering UPS for your portfolio, see our FREE research report to learn more.

Iridium (IRDM)

Trailing 12-Month Free Cash Flow Margin: 35%

With a constellation of 66 low-earth orbit satellites providing coverage to every inch of the planet, Iridium Communications (NASDAQ:IRDM) operates a global satellite network that provides voice and data services to customers in remote areas where traditional telecommunications are unavailable.

Why Does IRDM Give Us Pause?

1. Estimated sales growth of 2.6% for the next 12 months implies demand will slow from its two-year trend
2. Free cash flow margin dropped by 4.8 percentage points over the last five years, implying the company became more capital intensive as competition picked up
3. Low returns on capital reflect management’s struggle to allocate funds effectively

Iridium is trading at $19.08 per share, or 16.8x forward P/E. Check out our free in-depth research report to learn more about why IRDM doesn’t pass our bar.

Stocks We Like More

If your portfolio success hinges on just 4 stocks, your wealth is built on fragile ground. You have a small window to secure high-quality assets before the market widens and these prices disappear.

Don’t wait for the next volatility shock. Check out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 244% over the last five years (as of June 30, 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,326% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+354% five-year return). Find your next big winner with StockStory today.