Yahoo Finance

A company that generates cash isn’t automatically a winner. Some businesses stockpile cash but fail to reinvest wisely, limiting their ability to expand.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. Keeping that in mind, here is one cash-producing company that reinvests wisely to drive long-term success and two that may struggle to keep up.

Two Stocks to Sell:

Q2 Holdings (QTWO)

Trailing 12-Month Free Cash Flow Margin: 19.2%

Founded in 2004 by Hank Seale, Q2 (NYSE:QTWO) offers software-as-a-service that enables small banks to provide online banking and consumer lending services to their clients.

Why Does QTWO Worry Us?

1. Sales trends were unexciting over the last three years as its 11.7% annual growth was below the typical software company

2. Bad unit economics and steep infrastructure costs are reflected in its gross margin of 51.8%, one of the worst among software companies

3. Projected 2.4 percentage point decline in its free cash flow margin next year reflects the company’s plans to increase its investments to defend its market position

Q2 Holdings is trading at $90.29 per share, or 7.3x forward price-to-sales. Dive into our free research report to see why there are better opportunities than QTWO.

Commvault Systems (CVLT)

Trailing 12-Month Free Cash Flow Margin: 20.5%

Originally formed in 1988 as part of Bell Labs, Commvault (NASDAQ: CVLT) provides enterprise software used for data backup and recovery, cloud and infrastructure management, retention, and compliance.

Why Are We Hesitant About CVLT?

1. Muted 9% annual revenue growth over the last three years shows its demand lagged behind its software peers

2. Day-to-day expenses have swelled relative to revenue over the last year as its operating margin fell by 1.6 percentage points

At $182.04 per share, Commvault Systems trades at 7.2x forward price-to-sales. Read our free research report to see why you should think twice about including CVLT in your portfolio, it’s free.

One Stock to Buy:

Sterling (STRL)

Trailing 12-Month Free Cash Flow Margin: 21.6%

Involved in the construction of a major highway, the Grand Parkway in Houston, TX, Sterling Infrastructure (NASDAQ:STRL) provides civil infrastructure construction.

Why Are We Backing STRL?

1. Market share has increased this cycle as its 11.9% annual revenue growth over the last five years was exceptional

2. Free cash flow margin expanded by 13.9 percentage points over the last five years, providing additional flexibility for investments and share buybacks/dividends

3. Improving returns on capital reflect management’s ability to monetize investments