Companies that burn cash at a rapid pace can run into serious trouble if they fail to secure funding. Without a clear path to profitability, these businesses risk dilution, mounting debt, or even bankruptcy.
Not all companies are worth the risk, and that’s why we built StockStory - to help you spot the red flags. That said, here is one high-risk, high-reward company that could turn today’s losses into tomorrow’s gains and two to leave off your radar.
Two Stocks to Sell:
Leslie's (LESL)
Trailing 12-Month Free Cash Flow Margin: 0.6%
Named after founder Philip Leslie, who established the company in 1963, Leslie’s (NASDAQ: LESL) is a retailer that sells pool and spa supplies, equipment, and maintenance services.
Why Do We Think LESL Will Underperform?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and store experience
- Performance over the past three years shows each sale was less profitable as its earnings per share dropped by 32.9% annually, worse than its revenue
- 20× net-debt-to-EBITDA ratio makes lenders less willing to extend additional capital, potentially necessitating dilutive equity offerings
At $1.04 per share, Leslie's trades at 18.2x forward EV-to-EBITDA. Read our free research report to see why you should think twice about including LESL in your portfolio.
Insperity (NSP)
Trailing 12-Month Free Cash Flow Margin: -4.5%
Pioneering the professional employer organization (PEO) industry it helped establish, Insperity (NYSE: NSP) provides human resources outsourcing services to small and medium-sized businesses, handling payroll, benefits, compliance, and HR administration.
Why Do We Steer Clear of NSP?
- Muted 2.5% annual revenue growth over the last two years shows its demand lagged behind its business services peers
- Incremental sales over the last five years were much less profitable as its earnings per share fell by 26% annually while its revenue grew
- Capital intensity has ramped up over the last five years as its free cash flow margin decreased by 9.1 percentage points
Insperity’s stock price of $23.35 implies a valuation ratio of 11.6x forward P/E. Check out our free in-depth research report to learn more about why NSP doesn’t pass our bar.
One Stock to Buy:
Baldwin Insurance Group (BWIN)
Trailing 12-Month Free Cash Flow Margin: -5.6%
Rebranded from BRP Group in May 2024, Baldwin Insurance Group (NASDAQ: BWIN) is an independent insurance distribution company that provides tailored insurance, risk management, and employee benefits solutions to businesses and individuals.
Why Is BWIN a Top Pick?
- Existing business lines can expand without risky acquisitions as its organic revenue growth averaged 13.6% over the past two years
- Adjusted operating profits increased over the last five years as the company gained some leverage on its fixed costs and became more efficient
- Earnings per share grew by 22.5% annually over the last two years, massively outpacing its peers
Baldwin Insurance Group is trading at $15.74 per share, or 8.6x forward P/E. Is now the right time to buy? Find out in our full research report, it’s free.
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