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

Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here are three cash-producing companies to steer clear of and a few better alternatives.

Commvault (CVLT)

Trailing 12-Month Free Cash Flow Margin: 18%

Born from the need to create ironclad protection in an increasingly dangerous digital world, Commvault (NASDAQ: CVLT) provides data protection and cyber resilience software that helps organizations secure, back up, and recover their data across on-premises, hybrid, and multi-cloud environments.

Why Does CVLT Give Us Pause?

1. Sales trends were unexciting over the last five years as its 9.1% annual growth was well below the typical software company
2. Estimated sales growth of 13.2% for the next 12 months implies demand will slow from its two-year trend
3. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 1.1 percentage points

At $173.50 per share, Commvault trades at 6.5x forward price-to-sales. Check out our free in-depth research report to learn more about why CVLT doesn’t pass our bar.

Arrow Electronics (ARW)

Trailing 12-Month Free Cash Flow Margin: 1.6%

Founded as a single retail store, Arrow Electronics (NYSE: ARW) provides electronic components and enterprise computing solutions to businesses globally.

Why Do We Pass on ARW?

1. Products and services are facing significant end-market challenges during this cycle as sales have declined by 10.8% annually over the last two years
2. Sales were less profitable over the last two years as its earnings per share fell by 31% annually, worse than its revenue declines
3. Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability

Arrow Electronics is trading at $119.83 per share, or 9.8x forward P/E. Read our free research report to see why you should think twice about including ARW in your portfolio.

Cognex (CGNX)

Trailing 12-Month Free Cash Flow Margin: 19.3%

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 Wary of CGNX?

1. 2% annual revenue growth over the last two years was slower than its business services peers
2. 15.8 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. Diminishing returns on capital suggest its earlier profit pools are drying up

Cognex’s stock price of $46.54 implies a valuation ratio of 44.2x forward P/E. To fully understand why you should be careful with CGNX, check out our full research report (it’s free for active Edge members).

Stocks We Like More

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