While profitability is essential, it doesn’t guarantee long-term success. Some companies that rest on their margins will lose ground as competition intensifies - as Jeff Bezos said, "Your margin is my opportunity".
Not all profitable companies are created equal, and that’s why we built StockStory - to help you find the ones that truly shine bright. That said, here is one profitable company that leverages its financial strength to beat the competition and two that may struggle to keep up.
Two Stocks to Sell:
Semtech (SMTC)
Trailing 12-Month GAAP Operating Margin: 7%
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 Is SMTC Risky?
- Historical operating margin losses have deepened over the last five years as it prioritized growth over profits
- Low free cash flow margin of 9.3% declined over the last five years as its investments ramped, giving it little breathing room
- Negative returns on capital show management lost money while trying to expand the business, and its shrinking returns suggest its past profit sources are losing steam
Semtech’s stock price of $71.08 implies a valuation ratio of 36.6x forward P/E. Check out our free in-depth research report to learn more about why SMTC doesn’t pass our bar.
Covenant Logistics (CVLG)
Trailing 12-Month GAAP Operating Margin: 3.1%
Started with 25 trucks and 50 trailers, Covenant Logistics (NASDAQ: CVLG) is a provider of expedited long haul freight services, offering a range of logistics solutions.
Why Do We Think CVLG Will Underperform?
- Sales were flat over the last two years, indicating it’s failed to expand this cycle
- 12.3 percentage point decline in its free cash flow margin over the last five years reflects the company’s increased investments to defend its market position
- Shrinking returns on capital suggest that increasing competition is eating into the company’s profitability
At $23.27 per share, Covenant Logistics trades at 12.7x forward P/E. If you’re considering CVLG for your portfolio, see our FREE research report to learn more.
One Stock to Watch:
Parsons (PSN)
Trailing 12-Month GAAP Operating Margin: 6.4%
Delivering aerospace technology during the Cold War-era, Parsons (NYSE: PSN) offers engineering, construction, and cybersecurity solutions for the infrastructure and defense sectors.
Why Are We Positive On PSN?
- Annual revenue growth of 13.4% over the last two years was superb and indicates its market share increased during this cycle
- Operating margin improvement of 2.9 percentage points over the last five years demonstrates its ability to scale efficiently
- Share buybacks catapulted its annual earnings per share growth to 19%, which outperformed its revenue gains over the last two years
Parsons is trading at $61.22 per share, or 18.5x forward P/E. Is now a good time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .
High-Quality Stocks for All Market Conditions
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