Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.
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 two cash-producing companies that excel at turning cash into shareholder value and one best left off your watchlist.
One Stock to Sell:
Paylocity (PCTY)
Trailing 12-Month Free Cash Flow Margin: 23.6%
Operating in a field where companies traditionally juggled multiple disconnected systems, Paylocity (NASDAQ: PCTY) provides cloud-based human capital management and payroll software solutions that help businesses manage their workforce and HR processes.
Why Do We Think Twice About PCTY?
- Customers were hesitant to make long-term commitments to its software as its 13.4% average ARR growth over the last year was sluggish
- Estimated sales growth of 7% for the next 12 months implies demand will slow from its two-year trend
- Operating margin expanded by 1.4 percentage points over the last year as it scaled and became more efficient
At $105.39 per share, Paylocity trades at 3.3x forward price-to-sales. If you’re considering PCTY for your portfolio, see our FREE research report to learn more.
Two Stocks to Watch:
Super Micro (SMCI)
Trailing 12-Month Free Cash Flow Margin: 1.6%
Founded in Silicon Valley in 1993 and known for its modular "building block" approach to server design, Super Micro Computer (NASDAQ: SMCI) designs and manufactures high-performance, energy-efficient server and storage systems for data centers, cloud computing, AI, and edge computing applications.
Why Is SMCI a Good Business?
- Annual revenue growth of 74.1% over the last two years was superb and indicates its market share increased during this cycle
- Earnings per share have massively outperformed its peers over the last five years, increasing by 45.5% annually
- Free cash flow turned positive over the last five years, indicating the company has passed a significant test
Super Micro is trading at $27.37 per share, or 10.7x forward P/E. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
Inspire Medical Systems (INSP)
Trailing 12-Month Free Cash Flow Margin: 8.6%
Offering an alternative for the millions who struggle with traditional CPAP machines, Inspire Medical Systems (NYSE: INSP) develops and sells an implantable neurostimulation device that treats obstructive sleep apnea by stimulating nerves to keep airways open during sleep.
Why Could INSP Be a Winner?
- Market share has increased this cycle as its 51.2% annual revenue growth over the last five years was exceptional
- Earnings growth has trumped its peers over the last five years as its EPS has compounded at 25.9% annually
- Free cash flow margin expanded by 19.2 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends
Inspire Medical Systems’s stock price of $55.76 implies a valuation ratio of 27.8x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
High-Quality Stocks for All Market Conditions
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