While some companies burn cash to fuel expansion, others struggle to turn spending into sustainable growth. A high cash burn rate without a strong balance sheet can leave investors exposed to significant downside.
Negative cash flow can lead to trouble, but StockStory helps you identify the businesses that stand a chance of making it through. That said, here is one high-risk, high-reward company investing aggressively to carve out a leadership position and two that could run into serious trouble.
Two Stocks to Sell:
Richardson Electronics (RELL)
Trailing 12-Month Free Cash Flow Margin: -2.6%
Founded in 1947, Richardson Electronics (NASDAQ: RELL) is a distributor of power grid and microwave tubes as well as consumables related to those products.
Why Do We Pass on RELL?
- Annual revenue growth of 1.5% over the last two years was below our standards for the industrials sector
- Cash-burning tendencies make us wonder if it can sustainably generate shareholder value
- Eroding returns on capital from an already low base indicate that management’s recent investments are destroying value
Richardson Electronics is trading at $18.10 per share, or 47.8x forward P/E. If you’re considering RELL for your portfolio, see our FREE research report to learn more.
STAAR Surgical (STAA)
Trailing 12-Month Free Cash Flow Margin: -18.9%
With over 2.5 million implants performed worldwide, STAAR Surgical (NASDAQ: STAA) designs and manufactures implantable lenses that correct vision problems without removing the eye's natural lens.
Why Should You Dump STAA?
- Annual sales declines of 5.7% for the past two years show its products and services struggled to connect with the market during this cycle
- Free cash flow margin shrank by 26.6 percentage points over the last five years, suggesting the company is consuming more capital to stay competitive
- Shrinking returns on capital from an already weak position reveal that neither previous nor ongoing investments are yielding the desired results
STAAR Surgical’s stock price of $29.12 implies a valuation ratio of 38.4x forward P/E. Read our free research report to see why you should think twice about including STAA in your portfolio.
One Stock to Watch:
Kratos (KTOS)
Trailing 12-Month Free Cash Flow Margin: -9.4%
Established with a commitment to supporting national security, Kratos (NASDAQ: KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Why Do We Watch KTOS?
- Average organic revenue growth of 14.6% over the past two years demonstrates its ability to expand independently without relying on acquisitions
- Projected revenue growth of 29.9% for the next 12 months is above its two-year trend, pointing to accelerating demand
- Earnings per share grew by 15.8% annually over the last two years and trumped its peers
At $54.01 per share, Kratos trades at 71.3x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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