3 Cash-Producing Stocks Walking a Fine Line

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

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here are three cash-producing companies to avoid and some better opportunities instead.

Rapid7 (RPD)

Trailing 12-Month Free Cash Flow Margin: 18.3%

Founded in 2000 with the idea that network security comes before endpoint security, Rapid7 (NASDAQ:RPD) provides software as a service that helps companies understand where they are exposed to cyber security risks, quickly detect breaches and respond to them.

Why Does RPD Fall Short?

1. Average billings growth of 4.6% over the last year was subpar, suggesting it struggled to push its software and might have to lower prices to stimulate demand
2. Estimated sales growth of 2.4% for the next 12 months implies demand will slow from its three-year trend
3. Long payback periods on sales and marketing expenses limit customer growth and signal the company operates in a highly competitive environment

Rapid7’s stock price of $23.54 implies a valuation ratio of 1.8x forward price-to-sales. To fully understand why you should be careful with RPD, check out our full research report (it’s free).

TreeHouse Foods (THS)

Trailing 12-Month Free Cash Flow Margin: 3.8%

Whether it be packaged crackers, broths, or beverages, Treehouse Foods (NYSE:THS) produces a wide range of private-label foods for grocery and food service customers.

Why Are We Out on THS?

1. Declining unit sales over the past two years suggest it might have to lower prices to stimulate growth
2. Gross margin of 16.8% is below its competitors, leaving less money to invest in areas like marketing and production facilities
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

TreeHouse Foods is trading at $22.26 per share, or 9.4x forward price-to-earnings. Check out our free in-depth research report to learn more about why THS doesn’t pass our bar.

YETI (YETI)

Trailing 12-Month Free Cash Flow Margin: 12%

Founded by two brothers from Texas, YETI (NYSE:YETI) specializes in durable outdoor goods including coolers, drinkware, and other gear tailored to adventure enthusiasts.

Why Are We Hesitant About YETI?

1. Lackluster 7.1% annual revenue growth over the last two years indicates the company is losing ground to competitors
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 6.3%
3. Diminishing returns on capital suggest its earlier profit pools are drying up

At $29.48 per share, YETI trades at 10x forward price-to-earnings. If you’re considering YETI for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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