Even if a company is profitable, it doesn’t always mean it’s a great investment. Some struggle to maintain growth, face looming threats, or fail to reinvest wisely, limiting their future potential.

A business making money today isn’t necessarily a winner, which is why we analyze companies across multiple dimensions at StockStory. Keeping that in mind, here are three profitable companies to avoid and some better opportunities instead.

Carter's (CRI)

Trailing 12-Month GAAP Operating Margin: 5%

Rumored to sell more than 10 products for every child born in the United States, Carter's (NYSE: CRI) is an American designer and marketer of children's apparel.

Why Do We Think CRI Will Underperform?

1. Weak same-store sales trends over the past two years suggest there may be few opportunities in its core markets to open new locations
2. Ability to fund investments or reward shareholders with increased buybacks or dividends is restricted by its weak free cash flow margin of 5.4% for the last two years
3. Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results

Carter’s stock price of $35.59 implies a valuation ratio of 11.7x forward P/E. Check out our free in-depth research report to learn more about why CRI doesn’t pass our bar.

XPO (XPO)

Trailing 12-Month GAAP Operating Margin: 8%

Owning a mobile game simulating freight operations for the Tour de France, XPO (NYSE: XPO) is a transportation company specializing in expedited shipping services.

Why Are We Wary of XPO?

1. Sales trends were unexciting over the last two years as its 2.6% annual growth was below the typical industrials company
2. Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 17.3%
3. Low free cash flow margin of 1.8% for the last five years gives it little breathing room, constraining its ability to self-fund growth or return capital to shareholders

At $198.50 per share, XPO trades at 43.6x forward P/E. To fully understand why you should be careful with XPO, check out our full research report (it’s free).

Solaris Energy Infrastructure (SEI)

Trailing 12-Month GAAP Operating Margin: 21.8%

After acquiring Mobile Energy Rentals in 2024 to enter the distributed power market, Solaris Energy Infrastructure (NYSE: SEI) leases mobile power equipment and provides logistics services for oil and gas well completion.

Why Does SEI Give Us Pause?

1. Subscale operations are evident in its revenue base of $622.2 million, meaning it has fewer distribution channels than its larger rivals
2. Negative free cash flow raises questions about the return timeline for its investments
3. Unfavorable liquidity position could lead to additional equity financing that dilutes shareholders

Solaris Energy Infrastructure is trading at $55.01 per share, or 43.7x forward P/E. Read our free research report to see why you should think twice about including SEI in your portfolio.

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