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 avoid and some better opportunities instead.

Semtech (SMTC)

Trailing 12-Month Free Cash Flow Margin: 5.5%

A public company since the late 1960s, Semtech (NASDAQ: SMTC) is a provider of analog and mixed-signal semiconductors used for Internet of Things systems and cloud connectivity.

Why Do We Steer Clear of SMTC?

1. Persistent operating losses and eroding margin over the last five years point to its preference for growth over profits
2. Increased cash burn over the last five years raises questions about the return timeline for its investments
3. Negative returns on capital show that some of its growth strategies have backfired, and its falling returns suggest its earlier profit pools are drying up

Semtech’s stock price of $35 implies a valuation ratio of 20.8x forward P/E. Check out our free in-depth research report to learn more about why SMTC doesn’t pass our bar.

Victoria's Secret (VSCO)

Trailing 12-Month Free Cash Flow Margin: 4%

Spun off from L Brands in 2020, Victoria’s Secret (NYSE: VSCO) is an intimate clothing and beauty retailer that sells its own brands of lingerie, undergarments, and personal fragrances.

Why Are We Wary of VSCO?

1. Poor same-store sales performance over the past two years indicates it’s having trouble bringing new shoppers into its brick-and-mortar locations
2. Estimated sales for the next 12 months are flat and imply a softer demand environment
3. Responsiveness to unforeseen market trends is restricted due to its substandard operating profitability

At $19.50 per share, Victoria's Secret trades at 6.9x forward P/E. If you’re considering VSCO for your portfolio, see our FREE research report to learn more.

Lovesac (LOVE)

Trailing 12-Month Free Cash Flow Margin: 2.6%

Known for its oversized, premium beanbags, Lovesac (NASDAQ: LOVE) is a specialty furniture brand selling modular furniture.

Why Does LOVE Worry Us?

1. Muted 2.2% annual revenue growth over the last two years shows its demand lagged behind its consumer discretionary peers
2. Capital intensity will likely ramp up in the next year as its free cash flow margin is expected to contract by 1.5 percentage points
3. Diminishing returns on capital suggest its earlier profit pools are drying up

Lovesac is trading at $21 per share, or 44.1x forward P/E. Dive into our free research report to see why there are better opportunities than LOVE.

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