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".

Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. Keeping that in mind, here are three profitable companies to avoid and some better opportunities instead.

Walmart (WMT)

Trailing 12-Month GAAP Operating Margin: 4.3%

Known for its large-format Supercenters, Walmart (NYSE:WMT) is a retail pioneer that serves a budget-conscious consumer who is looking for a wide range of products under one roof.

Why Are We Wary of WMT?

1. Large revenue base makes it harder to increase sales quickly, and its annual revenue growth of 4.8% over the last six years was below our standards for the consumer retail sector
2. Widely-available products (and therefore stiff competition) result in an inferior gross margin of 24.7% that must be offset through higher volumes
3. Earnings per share fell by 10.9% annually over the last six years while its revenue grew, showing its incremental sales were much less profitable

Walmart’s stock price of $96.39 implies a valuation ratio of 36x forward P/E. Read our free research report to see why you should think twice about including WMT in your portfolio.

El Pollo Loco (LOCO)

Trailing 12-Month GAAP Operating Margin: 8.5%

With a name that translates into ‘The Crazy Chicken’, El Pollo Loco (NASDAQ:LOCO) is a fast food chain known for its citrus-marinated, fire-grilled chicken recipe that hails from the coastal town of Sinaloa, Mexico.

Why Should You Sell LOCO?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Subscale operations are evident in its revenue base of $476 million, meaning it has fewer distribution channels than its larger rivals
3. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 4%

At $9.45 per share, El Pollo Loco trades at 4.2x forward EV-to-EBITDA. To fully understand why you should be careful with LOCO, check out our full research report (it’s free).

Cognex (CGNX)

Trailing 12-Month GAAP Operating Margin: 13.8%

Founded in 1981 when computer vision was in its infancy, Cognex (NASDAQ:CGNX) develops machine vision systems and software that help manufacturers and logistics companies automate quality inspection and tracking of products.

Why Are We Out on CGNX?

1. Flat sales over the last two years suggest it must find different ways to grow during this cycle
2. 12.2 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. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Cognex is trading at $30.40 per share, or 32.9x forward P/E. Check out our free in-depth research report to learn more about why CGNX doesn’t pass our bar.

High-Quality Stocks for All Market Conditions

The market surged in 2024 and reached record highs after Donald Trump’s presidential victory in November, but questions about new economic policies are adding much uncertainty for 2025.

While the crowd speculates what might happen next, we’re homing in on the companies that can succeed regardless of the political or macroeconomic environment. Put yourself in the driver’s seat and build a durable portfolio 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 176% over the last five years.

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+351% five-year return). Find your next big winner with StockStory today for free.