In a bullish market, picking stocks is not an easy task. Investors might end up with overpriced and unprofitable stocks.
So, while choosing stocks, one should employ a meticulous strategy with focus on low risk stocks that usually provide steady returns. However, at times, with an aim to book higher returns, investors apply complex investment strategies, which may not lead to the desired returns.
Therefore, it’s advisable to use conventional strategies, based on key fundamentals, to select stocks. Not only are such strategies safe, they are valuable in bearish markets as well. One such strategy is focus on sales growth.
Why Sales Growth?
Consistent growth in sales is the key to the survival for any business. For any company, sales growth not only provides an insight into product demand and pricing power, it is important for growth projections and strategic decision making.
But investors often fail to consider sales growth as a dependable metric. This could be because of investors’ preconceived notion that a company’s stock price is generally sensitive to its earnings momentum.
Nevertheless, it should be kept in mind that in case a company incurs a loss (albeit temporarily), it is valued on its revenues as top-line growth (or decline) is usually an indicator of a company’s future earnings performance.
Further, in an improving economy, absence of sales growth indicates that the company’s market share is not increasing. Hence, some sustained sales growth is necessary to support the bottom line.
Hence, Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. The importance of the metric lies in the fact that management has limited opportunities to manipulate revenues unlike earnings.
However, a huge sales number does not necessarily convert into profits. Hence, it’s more prudent to consider a company’s cash position along with its sales number. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
Selection of Winning Stocks
A careful selection of stocks considering certain factors should help investors to not only build wealth but also beat the market.
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have added 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.
Nonetheless, sales growth and cash strength are not the absolute criteria for selecting stocks.
So, we added certain other factors to arrive at a winning strategy.
- Price-to-Sales (P/S) Ratio less than X-Industry: This metric determines 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 15 stocks that qualified the screening:
Hasbro, Inc. (HAS) operates as a play and entertainment company. This Pawtucket, RI-based company currently has a long-term expected EPS (earnings per share) growth rate of 13% and carries a Zacks Rank #2.
Western Digital Corp (WDC), based in Irvine, CA, develops, manufactures, and sells data storage devices and solutions worldwide. It has a long-term expected EPS growth rate of 12.1%. The company carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Voorhees, NJ, American Water Works Company Inc (AWK) provides water and wastewater services in the United States and Canada. The company currently has a long-term expected EPS growth rate of 7.4% and a Zacks Rank #2.
W.P. Carey Inc. REIT (WPC), based in New York, is an independent equity real estate investment trust. The company has a long-term expected EPS growth rate of 4% and carries a Zacks Rank #2.
The Interpublic Group of Companies Inc (IPG) provides advertising and marketing services worldwide. This New York based company has a long-term expected EPS growth rate of 7.4% and carries a Zacks Rank #2.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report