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 are two high-risk, high-reward companies investing aggressively to carve out leadership positions and one to leave off your radar.
One Stock to Sell:
LGI Homes (LGIH)
Trailing 12-Month Free Cash Flow Margin: -9.6%
Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.
Why Do We Think LGIH Will Underperform?
- Product roadmap and go-to-market strategy need to be reconsidered as its backlog has averaged 10.4% declines over the past two years
- Diminishing returns on capital suggest its earlier profit pools are drying up
- Short cash runway increases the probability of a capital raise that dilutes existing shareholders
LGI Homes’s stock price of $43.45 implies a valuation ratio of 11.6x forward P/E. To fully understand why you should be careful with LGIH, check out our full research report (it’s free for active Edge members).
Two Stocks to Watch:
SoFi (SOFI)
Trailing 12-Month Free Cash Flow Margin: -95.5%
Starting as a student loan refinancing company founded by Stanford business school students in 2011, SoFi Technologies (NASDAQ: SOFI) operates a digital financial platform offering lending, banking, investing, and other financial services to help members borrow, save, spend, invest, and protect their money.
Why Will SOFI Outperform?
- Annual revenue growth of 31.3% over the past two years was outstanding, reflecting market share gains this cycle
- Additional sales over the last two years increased its profitability as the 92.5% annual growth in its earnings per share outpaced its revenue
At $26.14 per share, SoFi trades at 47.8x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free for active Edge members.
Charles Schwab (SCHW)
Trailing 12-Month Free Cash Flow Margin: -6.1%
Founded in 1971 as a disruptive force challenging Wall Street's high fees and limited access, Charles Schwab (NYSE: SCHW) is a wealth management and brokerage firm that provides investment services, banking, and financial advice to individual investors and independent advisors.
Why Do We Watch SCHW?
- Annual revenue growth of 17.8% over the past five years was outstanding, reflecting market share gains this cycle
- Earnings growth was above the peer group average over the last five years as its EPS compounded at 14.5% annually
- Market-beating return on equity illustrates that management has a knack for investing in profitable ventures
Charles Schwab is trading at $100.50 per share, or 18.3x forward P/E. Is now the time to initiate a position? See for yourself in our full research report, it’s free for active Edge members.
High-Quality Stocks for All Market Conditions
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