Generating cash is essential for any business, but not all cash-rich companies are great investments. Some produce plenty of cash but fail to allocate it effectively, leading to missed opportunities.

Not all companies are created equal, and StockStory is here to surface the ones with real upside. That said, here is one cash-producing company that excels at turning cash into shareholder value and two that may struggle to keep up.

Two Stocks to Sell:

Target (TGT)

Trailing 12-Month Free Cash Flow Margin: 2.8%

With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE: TGT) serves the suburban consumer who is looking for a wide range of products under one roof.

Why Does TGT Give Us Pause?

1. Lagging same-store sales over the past two years suggest it might have to change its pricing and marketing strategy to stimulate demand
2. Commoditized inventory, bad unit economics, and high competition are reflected in its low gross margin of 28.1%
3. Performance over the past six years shows its incremental sales were much less profitable, as its earnings per share fell by 4.2% annually

At $89.85 per share, Target trades at 11.6x forward P/E. Check out our free in-depth research report to learn more about why TGT doesn’t pass our bar.

Bright Horizons (BFAM)

Trailing 12-Month Free Cash Flow Margin: 8.7%

Founded in 1986, Bright Horizons (NYSE: BFAM) is a global provider of child care, early education, and workforce support solutions.

Why Should You Dump BFAM?

1. Organic revenue growth fell short of our benchmarks over the past two years and implies it may need to improve its products, pricing, or go-to-market strategy
2. Estimated sales growth of 7.6% for the next 12 months implies demand will slow from its two-year trend
3. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Bright Horizons’s stock price of $98.86 implies a valuation ratio of 22x forward P/E. If you’re considering BFAM for your portfolio, see our FREE research report to learn more.

One Stock to Buy:

Microsoft (MSFT)

Trailing 12-Month Free Cash Flow Margin: 25.4%

Originally named "Micro-soft" for microcomputer software when founded in 1975, Microsoft (NASDAQ: MSFT) is a global technology company that develops software, cloud services, devices, and AI solutions for consumers, businesses, and organizations worldwide.

Why Should You Buy MSFT?

1. Microsoft is one of the great brands not just in tech but all of business. It produces mission-critical software and bundles it together, resulting in cream-of-the-crop gross margins.
2. The company's elite unit economics lead to robust profit margins that improve over time. This speaks to the scale advantages and operating efficiency across its diverse portfolio, which spans everything from Office and Azure to Minecraft.
3. Microsoft has a virtuous cycle of returns. Its dominant market position enables it to generate strong free cash flow, and it reinvests these funds into promising ventures that further strengthen its competitive moat.

Microsoft is trading at $510.18 per share, or 33x forward price-to-earnings. Is now the time to initiate a position? Find out in our full research report, it’s free for active Edge members.

Stocks We Like Even More

Donald Trump’s April 2025 "Liberation Day" tariffs sent markets into a tailspin, but stocks have since rebounded strongly, proving that knee-jerk reactions often create the best buying opportunities.

The smart money is already positioning for the next leg up. Don’t miss out on the recovery - check out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 183% over the last five years (as of March 31st 2025).

Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,545% between March 2020 and March 2025) as well as under-the-radar businesses like the once-micro-cap company Tecnoglass (+1,754% five-year return). Find your next big winner with StockStory today for free. Find your next big winner with StockStory today. Find your next big winner with StockStory today

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