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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.

Cash flow is valuable, but it’s not everything - StockStory helps you identify the companies that truly put it to work. Keeping that in mind, here is one cash-producing company that excels at turning cash into shareholder value and two that may face some trouble.

Two Stocks to Sell:

Guess (GES)

Trailing 12-Month Free Cash Flow Margin: 1.2%

Flexing the iconic upside-down triangle logo with a question mark, Guess (NYSE:GES) is a global fashion brand known for its trendy clothing, accessories, and denim wear.

Why Do We Pass on GES?

1. Muted 2.3% annual revenue growth over the last five years shows its demand lagged behind its consumer discretionary peers

2. Estimated sales growth of 3.6% for the next 12 months implies demand will slow from its two-year trend

3. High net-debt-to-EBITDA ratio of 5× could force the company to raise capital at unfavorable terms if market conditions deteriorate

Guess’s stock price of $11.68 implies a valuation ratio of 5.6x forward P/E. To fully understand why you should be careful with GES, check out our full research report (it’s free).

Johnson Controls (JCI)

Trailing 12-Month Free Cash Flow Margin: 11.5%

Founded after patenting the electric room thermostat, Johnson Controls (NYSE:JCI) specializes in building products and technology solutions, including HVAC systems, fire and security systems, and energy storage.

Why Should You Dump JCI?

1. Core business is underperforming as its organic revenue has disappointed over the past two years, suggesting it might need acquisitions to stimulate growth

2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 2.9%

3. Underwhelming 6.6% return on capital reflects management’s difficulties in finding profitable growth opportunities

Johnson Controls is trading at $90.64 per share, or 23.8x forward P/E. Check out our free in-depth research report to learn more about why JCI doesn’t pass our bar.

One Stock to Buy:

KLA Corporation (KLAC)

Trailing 12-Month Free Cash Flow Margin: 30.4%

Formed by the 1997 merger of the two leading semiconductor yield management companies, KLA Corporation (NASDAQ:KLAC) is the leading supplier of equipment used to measure and inspect semiconductor chips.

Why Will KLAC Beat the Market?

1. Annual revenue growth of 15.6% over the last five years was superb and indicates its market share increased during this cycle

2. Excellent operating margin of 35.9% highlights the efficiency of its business model, and its rise over the last five years was fueled by some leverage on its fixed costs

3. Strong free cash flow margin of 31.2% enables it to reinvest or return capital consistently