3 Profitable Stocks with Questionable Fundamentals

Not all profitable companies are built to last - some rely on outdated models or unsustainable advantages. Just because a business is in the green today doesn’t mean it will thrive tomorrow.

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 steer clear of and a few better alternatives.

LKQ (LKQ)

Trailing 12-Month GAAP Operating Margin: 8.5%

A global distributor of vehicle parts and accessories, LKQ (NASDAQ:LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.

Why Is LKQ Risky?

1. Absence of organic revenue growth over the past two years suggests it may have to lean into acquisitions to drive its expansion
2. Estimated sales growth of 2% for the next 12 months implies demand will slow from its two-year trend
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

At $38.10 per share, LKQ trades at 10.4x forward P/E. Check out our free in-depth research report to learn more about why LKQ doesn’t pass our bar.

Gates Industrial Corporation (GTES)

Trailing 12-Month GAAP Operating Margin: 14.3%

Helping create one of the most memorable moments for the iconic “Jurassic Park” film, Gates (NYSE:GTES) offers power transmission and fluid transfer equipment for various industries.

Why Do We Think Twice About GTES?

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. Anticipated sales growth of 1.1% for the next year implies demand will be shaky
3. Underwhelming 6.6% return on capital reflects management’s difficulties in finding profitable growth opportunities

Gates Industrial Corporation’s stock price of $22.30 implies a valuation ratio of 15.2x forward P/E. Dive into our free research report to see why there are better opportunities than GTES.

Zebra (ZBRA)

Trailing 12-Month GAAP Operating Margin: 15.2%

Taking its name from the black and white stripes of barcodes, Zebra Technologies (NASDAQ:ZBRA) provides barcode scanners, mobile computers, RFID systems, and other data capture technologies that help businesses track assets and optimize operations.

Why Do We Think ZBRA 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 decreased by more than its revenue over the last two years, showing each sale was less profitable
3. Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value

Zebra is trading at $288.76 per share, or 18.9x forward P/E. To fully understand why you should be careful with ZBRA, check out our full research report (it’s free).

Stocks We Like More

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