While strong cash flow is a key indicator of stability, it doesn’t always translate to superior returns. Some cash-heavy businesses struggle with inefficient spending, slowing demand, or weak competitive positioning.

Luckily for you, we built StockStory to help you separate the good from the bad. That said, here are three cash-producing companies to avoid and some better opportunities instead.

8x8 (EGHT)

Trailing 12-Month Free Cash Flow Margin: 5.4%

Named after its founding year (1987) with "8x8" representing binary code for communications, 8x8 (NASDAQ: EGHT) provides cloud-based contact center and unified communications solutions that enable businesses to manage customer interactions and internal communications through a single platform.

Why Do We Think EGHT Will Underperform?

1. Flat billings over the last year suggest it may need to improve its products, pricing, or go-to-market strategy to reinvigorate demand
2. Sales are projected to be flat over the next 12 months and imply weak demand
3. Customer acquisition costs take a while to recoup, making it difficult to justify sales and marketing investments that could increase revenue

At $2.15 per share, 8x8 trades at 0.4x forward price-to-sales. Check out our free in-depth research report to learn more about why EGHT doesn’t pass our bar.

Dollar General (DG)

Trailing 12-Month Free Cash Flow Margin: 5.6%

Appealing to the budget-conscious consumer, Dollar General (NYSE: DG) is a discount retailer that sells a wide range of household essentials, groceries, apparel/beauty products, and seasonal merchandise.

Why Does DG Fall Short?

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. Gross margin of 30% is an output of its commoditized inventory
3. Earnings per share have contracted by 17.4% annually over the last three years, a headwind for returns as stock prices often echo long-term EPS performance

Dollar General’s stock price of $132.81 implies a valuation ratio of 19.4x forward P/E. Read our free research report to see why you should think twice about including DG in your portfolio.

GameStop (GME)

Trailing 12-Month Free Cash Flow Margin: 14.9%

Drawing gaming fans with demo units set up with the latest releases, GameStop (NYSE: GME) sells new and used video games, consoles, and accessories, as well as pop culture merchandise.

Why Should You Dump GME?

1. GameStop’s brick-and-mortar engine keeps stalling as gamers migrate to digital downloads, and management is closing more outlets after shuttering hundreds of stores last year
2. The share price remains an unpredictable meme-stock roller-coaster, and the purchase of thousands of Bitcoins have fueled huge swings
3. On the bright side, the company has a large cash pile that gives CEO Ryan Cohen room to buy more Bitcoin or fund its collectibles and trading-card push

GameStop is trading at $22.07 per share, or 25x forward P/E. If you’re considering GME for your portfolio, see our FREE research report to learn more.

Stocks We Like More

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