3 Profitable Stocks in Hot Water

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".

Profits are valuable, but they’re not everything. At StockStory, we help you identify the companies that have real staying power. Keeping that in mind, here are three profitable companies that don’t make the cut and some better opportunities instead.

Spectrum Brands (SPB)

Trailing 12-Month GAAP Operating Margin: 6.4%

A leader in multiple consumer product categories, Spectrum Brands (NYSE:SPB) is a diversified company with a portfolio of trusted brands spanning home appliances, garden care, personal care, and pet care.

Why Do We Avoid SPB?

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. Negative free cash flow raises questions about the return timeline for its investments
3. ROIC of 0.6% reflects management’s challenges in identifying attractive investment opportunities, and its shrinking returns suggest its past profit sources are losing steam

Spectrum Brands’s stock price of $62.91 implies a valuation ratio of 11.7x forward price-to-earnings. Check out our free in-depth research report to learn more about why SPB doesn’t pass our bar.

TreeHouse Foods (THS)

Trailing 12-Month GAAP Operating Margin: 3.1%

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 Should You Dump THS?

1. Falling unit sales over the past two years show it’s struggled to move its products and had to rely on price increases
2. Easily substituted products (and therefore stiff competition) result in an inferior gross margin of 16.8% that must be offset through higher volumes
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

At $22.05 per share, TreeHouse Foods trades at 9.5x forward price-to-earnings. Dive into our free research report to see why there are better opportunities than THS.

Donaldson (DCI)

Trailing 12-Month GAAP Operating Margin: 15%

Playing a vital role in the historic Apollo 11 mission, Donaldson (NYSE:DCI) manufacturers and sells filtration equipment for various industries.

Why Does DCI Give Us Pause?

1. Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
2. Estimated sales growth of 2.3% for the next 12 months is soft and implies weaker demand
3. Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 3.7 percentage points

Donaldson is trading at $65.58 per share, or 17.1x forward price-to-earnings. To fully understand why you should be careful with DCI, check out our full research report (it’s free).

Stocks We Like More

Market indices reached historic highs following Donald Trump’s presidential victory in November 2024, but the outlook for 2025 is clouded by new trade policies that could impact business confidence and growth.

While this has caused many investors to adopt a "fearful" wait-and-see approach, we’re leaning into our best ideas that can grow regardless of the political or macroeconomic climate. Take advantage of Mr. Market by checking out our Top 5 Strong Momentum Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.