1 cash-producing stock to consider right now and 2 facing challenges

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.

Luckily for you, we built StockStory to help you separate the good from the bad. Keeping that in mind, here is one cash-producing company that excels at turning cash into shareholder value and two best left off your watchlist.

Two stocks to sell:

Allegro MicroSystems (ALGM)

Trailing 12-Month Free Cash Flow Margin: 9.3%

The result of a spinoff from Sanken in Japan, Allegro MicroSystems (NASDAQ:ALGM) is a designer of power management chips and distance sensors used in electric vehicles and data centers.

Why Are We Bearish on ALGM?

1. Sales were flat over the last two years, indicating it’s failed to expand this cycle

2. Substandard operating margin profitability and its deterioration over the last five years limit its responsiveness to unforeseen market trends

3. Low free cash flow margin of 8.1% declined over the last five years as its investments ramped, giving it little breathing room

At $32.09 per share, Allegro MicroSystems trades at 28.1x forward P/E. Read our free research report to see why you should think twice about including ALGM in your portfolio, it’s free.

Merit Medical Systems (MMSI)

Trailing 12-Month Free Cash Flow Margin: 12.9%

Founded in 1987 and now offering over 1,700 patented products across global markets, Merit Medical Systems (NASDAQ:MMSI) manufactures and markets specialized medical devices used in minimally invasive procedures for cardiology, radiology, oncology, critical care, and endoscopy.

Why Does MMSI Worry Us?

1. Modest revenue base of $1.58 billion gives it less fixed cost leverage and fewer distribution channels than larger companies

2. Below-average returns on capital indicate management struggled to find compelling investment opportunities

Merit Medical Systems’s stock price of $93.34 implies a valuation ratio of 21.5x forward P/E. If you’re considering MMSI for your portfolio, see our FREE research report to learn more.

One stock to watch:

Toast (TOST)

Trailing 12-Month Free Cash Flow Margin: 8.5%

Born from the frustrations of three friends waiting too long for their restaurant bill, Toast (NYSE:TOST) provides a cloud-based digital technology platform with software, payment processing, and hardware solutions built specifically for restaurants.

Why Are We Positive on TOST?

1. ARR trends over the last year show it’s maintaining a steady flow of long-term contracts that contribute positively to its revenue predictability

2. Estimated revenue growth of 19.9% for the next 12 months implies its momentum over the last two years will continue