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. That said, here are three cash-producing companies to steer clear of and a few better alternatives.

Home Depot (HD)

Trailing 12-Month Free Cash Flow Margin: 7.7%

Founded and headquartered in Atlanta, Georgia, Home Depot (NYSE: HD) is a home improvement retailer that sells everything from tools to building materials to appliances.

Why Does HD Worry Us?

1. Scale is a double-edged sword because it limits the company’s growth potential compared to its smaller competitors, as reflected in its below-average annual revenue increases of 1.5% for the last three years
2. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
3. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 33.4%

Home Depot’s stock price of $321.33 implies a valuation ratio of 21.8x forward P/E. Read our free research report to see why you should think twice about including HD in your portfolio.

Brunswick (BC)

Trailing 12-Month Free Cash Flow Margin: 7.4%

Formerly known as Brunswick-Balke-Collender Company, Brunswick (NYSE: BC) is a designer and manufacturer of recreational marine products, including boats, engines, and marine parts.

Why Should You Dump BC?

1. Annual revenue growth of 4.3% over the last five years was below our standards for the consumer discretionary sector
2. Free cash flow margin is projected to show no improvement next year
3. Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions

Brunswick is trading at $70.96 per share, or 17.2x forward P/E. If you’re considering BC for your portfolio, see our FREE research report to learn more.

L.B. Foster (FSTR)

Trailing 12-Month Free Cash Flow Margin: 4.7%

Founded with a $2,500 loan, L.B. Foster (NASDAQ: FSTR) is a provider of products and services for the transportation and energy infrastructure sectors, including rail products, construction materials, and coating solutions.

Why Is FSTR Not Exciting?

1. Backlog growth averaged a weak 4.4% over the past two years, suggesting it may need to tweak its product roadmap or go-to-market strategy
2. Earnings per share were flat over the last five years and fell short of the peer group average
3. Low returns on capital reflect management’s struggle to allocate funds effectively

At $27.82 per share, L.B. Foster trades at 18.7x forward P/E. To fully understand why you should be careful with FSTR, check out our full research report (it’s free).

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