The market had a surprisingly good week last week. Indices and most stocks trended higher, but there’s no guarantee they will continue to go up.

As more reports emerge of a pending supply chain crisis, investors need to be increasingly cautious of stocks that can hurt their portfolios. Our superior fundamental research can be your guide in these times of high volatility and help you avoid the stocks that can blow up a portfolio.

This week’s Danger Zone pick is especially dangerous. The company is burning cash at zombie stock levels, yet its valuation implies massive profit growth.

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This stock provides bad Risk/Reward based on:

  • declining profits amidst rising revenue,
  • value destroying acquisitions,
  • more profitable competitors,
  • large cash burn, and
  • a stock valuation that implies the company will grow profits to levels only seen during a global pandemic.

Profits Declining Despite Revenue Growth

This company’s revenue soared 47% year-over-year (YoY) in fiscal 2021 (Feb 2020 through Jan 2021) as it was able to take advantage of the peak demand for personal protective equipment (PPE) driven by COVID. In fact, the company’s disposables segment sales nearly doubled from $53 million in fiscal 2020 to $104 million in fiscal 2021.

Alongside soaring sales, the company benefited from higher prices, which drove the company’s net operating profit after-tax (NOPAT) to $32 million, the highest for the company in any year of our model (dates back to fiscal 1996).

However, the business looks much different now. While the company has been able to increase revenue through acquisitions, its NOPAT has declined YoY in each of the past four years.

Specifically, the company’s revenue rose from $159 million in fiscal 2021 to $167 in fiscal 2025, while its NOPAT fell from $32 million to less than $1 million over the same time.

Figure 1: Revenue and NOPAT: Fiscal 2021 – 2025

Sources: New Constructs, LLC and company filings.   

Cash Burn Is Getting Worse

This company generated an all-time high (dating back to fiscal 1996) free cash flow (FCF) of $26 million in fiscal 2021. However, recent years have seen record lows.

The company’s FCF has been negative on an annual basis over each of the last three fiscal years. From fiscal 2021 through fiscal 2025, the company has burned through a cumulative $64 million (36% of enterprise value) in FCF excluding acquisitions. See Figure 5.

Figure 5: Free Cash Flow: Fiscal 2021 – Fiscal 2025

Sources: New Constructs, LLC and company filings. 

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