In today’s fast changing and highly competitive business environment, persistent sales growth is the key to survival for any business. For any corporate house, sales growth not only provides an insight into product demand and pricing power, it is vital for growth projections and strategic decision making as well.
From an investment perspective, sales growth remains an important measure as well.
However, investors often fail to consider sales growth as a dependable metric when it comes to picking stocks. This might be because of their preconceived notion that a company’s stock price is typically sensitive to its earnings momentum.
Sales – A Better Metric than Earnings
It’s worth keeping in mind that in cases when companies incur a loss, albeit transitorily, they are valued on their revenues not earnings, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance.
Notably, in contrast with price to earnings and price to book value ratios, which can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
Further, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, superior profits could be achieved through continued revenue growth.
Additionally, earnings and book value are largely influenced by several factors including accounting decisions tied with depreciation, significant charges and inventory.
However, management has limited opportunities to manipulate sales, which further underscores the importance of P/S ratio.
Here’s a Better Strategy to Bet On
A huge sales number does not necessarily convert into profits. Hence, considering a company’s cash position along with its sales number can prove to be more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we added 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our primary screening parameters.
However, sales growth and cash strength are not the absolute criteria for selecting stocks.
So, we added a few other factors to arrive at a winning strategy.
- Price-to-Sales (P/S) Ratio less than X-Industry: This metric measures the value placed on each dollar of a company’s revenues. The lower the ratio, the better it is for picking a stock since the investor is paying less for each unit of sales.
- % Change F1 Sales Estimate Revisions (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.
- Operating Margin (Average Last 5 years) greater than 5%: Operating margin measures how much every dollar of a company’s sales translates into profits. A high ratio indicates that the company has good cost control and sales are increasing faster than costs, an optimal situation for the company.
- Return on Equity (ROE) greater than 5%: This metric will ensure that sales growth is being translated into profits and the company is not hoarding cash. A high ROE means the company is spending wisely and is in all likelihood profitable.
- Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Here are five of the 10 stocks that made it through the screen:
Lam Research Corporation (LRCX), based in Fremont, CA, is a supplier of wafer fabrication equipment and services to the semiconductor industry worldwide. The company currently has a long-term expected earnings per share (EPS) growth rate of 12.3% and carries a Zacks Rank #2.
Teradyne, Inc. (TER), based in North Reading, MA, is engaged in designing, developing, manufacturing, and selling automatic test equipment worldwide. The company has a long-term expected EPS growth rate of 13.3% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rockwell Automation (ROK) is engaged in providing industrial automation and information solutions globally. This Milwaukee, WI-based company has a long-term expected EPS growth rate of 7.6% with a Zacks Rank #2.
Principal Financial Group Inc (PFG), based in Des Moines, IA, is engaged in providing a wide range of retirement savings, investment and insurance products and services. The company has a long-term expected EPS growth rate of 8.6% with a Zacks Rank #2.
Stifel Financial Corp (SF) is a financial services holding company engaged in offering an array of services including retail brokerage, securities trading, investment banking, retail, consumer, and commercial banking. This St. Louis, MO-based company has a long-term expected EPS growth rate of 12% with a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance
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