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.
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 avoid and some better opportunities instead.
Zoom (ZM)
Trailing 12-Month Free Cash Flow Margin: 38.6%
Once the verb that defined remote work during the pandemic ("let's Zoom later"), Zoom (NASDAQ:ZM) provides a cloud-based platform for video meetings, phone calls, team chat, and collaboration tools that helps businesses and individuals connect virtually.
Why Do We Avoid ZM?
- Underwhelming ARR growth of 5% over the last year suggests the company faced challenges in acquiring and retaining long-term customers
- Net revenue retention rate of 98.5% shows it has a tough time retaining customers
- Anticipated sales growth of 3.9% for the next year implies demand will be shaky
Zoom is trading at $96.63 per share, or 5.9x forward price-to-sales. Check out our free in-depth research report to learn more about why ZM doesn’t pass our bar.
Churchill Downs (CHDN)
Trailing 12-Month Free Cash Flow Margin: 19%
Famous for hosting the Kentucky Derby, Churchill Downs (NASDAQ:CHDN) operates a horse racing, online wagering, and gaming entertainment business in the United States.
Why Are We Bearish on CHDN?
- Sales trends were unexciting over the last five years as its 15.5% annual growth was below the typical consumer discretionary company
- Below-average returns on capital indicate management struggled to find compelling investment opportunities
- Rising returns on capital show management is making relatively better investments
At $85.89 per share, Churchill Downs trades at 12.2x forward P/E. Dive into our free research report to see why there are better opportunities than CHDN.
A. O. Smith (AOS)
Trailing 12-Month Free Cash Flow Margin: 16.8%
Credited with the invention of the glass-lined water heater, A.O. Smith (NYSE:AOS) manufactures water heating and treatment products for various industries.
Why Does AOS Give Us Pause?
- Annual sales declines of 1.6% for the past two years show its products and services struggled to connect with the market during this cycle
- Earnings per share have dipped by 2.7% annually over the past two years, which is concerning because stock prices follow EPS over the long term
- Waning returns on capital imply its previous profit engines are losing steam
A. O. Smith’s stock price of $60.00 implies a valuation ratio of 15.5x forward P/E. To fully understand why you should be careful with AOS, check out our full research report (it’s free).
Stocks We Like More
ONE MORE THING: Top 6 Stocks for This Week. This market is separating quality stocks from expensive ones fast. AI is taking down whole sectors with no warning. In a rotation this fast, you need more than a list of good companies.
Our AI system flagged Palantir before it ran 1,662% between October 2022 and February 2026. AppLovin before it ran 753% between February 2024 and February 2026. Nvidia before it ran 1,178% between January 2023 and February 2026. Each week it produces 6 new names that pass the same tests. Get Our Top 6 Stocks for Free HERE.
Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-small-cap company Exlservice (+271% between June 2020 and June 2025). Find your next big winner with StockStory today.