3 Profitable Stocks with Warning Signs

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.

Williams-Sonoma (WSM)

Trailing 12-Month GAAP Operating Margin: 18.6%

Started in 1956 as a store specializing in French cookware, Williams-Sonoma (NYSE:WSM) is a specialty retailer of higher-end kitchenware, home goods, and furniture.

Why Are We Hesitant About WSM?

1. Ongoing store closures and lackluster same-store sales indicate sluggish demand and a focus on consolidation
2. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
3. Earnings growth underperformed the sector average over the last three years as its EPS grew by just 3.3% annually

Williams-Sonoma’s stock price of $206.79 implies a valuation ratio of 24x forward P/E. Dive into our free research report to see why there are better opportunities than WSM.

Harley-Davidson (HOG)

Trailing 12-Month GAAP Operating Margin: 8.6%

Founded in 1903, Harley-Davidson (NYSE:HOG) is an American motorcycle manufacturer known for its heavyweight motorcycles designed for cruising on highways.

Why Should You Sell HOG?

1. Sluggish trends in its motorcycles sold suggest customers aren’t adopting its solutions as quickly as the company hoped
2. Free cash flow margin is forecasted to shrink by 4.4 percentage points in the coming year, suggesting the company will consume more capital to keep up with its competitors
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Harley-Davidson is trading at $20.12 per share, or 71.9x forward P/E. If you’re considering HOG for your portfolio, see our FREE research report to learn more.

WEX (WEX)

Trailing 12-Month GAAP Operating Margin: 24.9%

Originally founded in 1983 as Wright Express to serve the fleet card market, WEX (NYSE:WEX) provides payment processing and business solutions across fleet management, employee benefits, and corporate payments sectors.

Why Does WEX Worry Us?

1. Annual revenue growth of 2.2% over the last two years was below our standards for the financials sector
2. Earnings growth over the last two years fell short of the peer group average as its EPS only increased by 4.5% annually

At $152.63 per share, WEX trades at 9.4x forward P/E. Check out our free in-depth research report to learn more about why WEX doesn’t pass our bar.

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