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Amid the ever changing market dynamics, investors often ignore 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.
However, it is worth mentioning that revenues are often more closely monitored than earnings when assessing the growth of a business. Further, when companies incur a loss, albeit transitorily, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance.
Also, 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. Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation.
Notably, 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.
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 indicates whether 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 six of the nine stocks that made it through the screen:
Electronic Arts Inc. (EA - Free Report) , based in Redwood City, CA, is engaged in developing, marketing, and distributing games, content, and online services for consoles, personal computers, tablets and mobile phones worldwide. The company currently has a long-term expected earnings per share (EPS) growth rate of 16.1% and carries a Zacks Rank #2.
Juniper Networks, Inc. (JNPR - Free Report) is a leading provider of networking solutions and communication devices. The company is engaged in developing, designing and selling network products globally. The Sunnyvale, CA-based currently has a long-term expected EPS growth rate of 9.5% and carries a Zacks Rank #2.
Morgan Stanley (MS - Free Report) is a leading financial services holding company headquartered in New York. The company serves a diversified group of clients including corporations, governments, financial institutions and individuals through more than 1,200 offices across 43 countries. The company has a long-term expected EPS growth rate of 9% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
VMware, Inc. is a Palo Alto, CA-based company engaged in providing virtualization and cloud infrastructure solutions in the U.S. and worldwide. The company has a long-term expected EPS growth rate of 12.7% with a Zacks Rank #2.
Lam Research Corporation (LRCX - Free Report) , based in Fremont, CA, is supplier of wafer fabrication equipment and services to the semiconductor industry worldwide. The company currently has a long-term expected EPS growth rate of 11.6% and carries a Zacks Rank #2.
Nordstrom Inc. (JWN - Free Report) , based in Seattle, WA, is a leading fashion specialty retailer, offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company currently has a long-term expected EPS growth rate of 9.7% and carries 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.
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.
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 »
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Bet on These 6 Stocks with Solid Sales Growth Now
Amid the ever changing market dynamics, investors often ignore 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.
However, it is worth mentioning that revenues are often more closely monitored than earnings when assessing the growth of a business. Further, when companies incur a loss, albeit transitorily, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance.
Also, 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. Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation.
Notably, 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.
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 indicates whether 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 six of the nine stocks that made it through the screen:
Electronic Arts Inc. (EA - Free Report) , based in Redwood City, CA, is engaged in developing, marketing, and distributing games, content, and online services for consoles, personal computers, tablets and mobile phones worldwide. The company currently has a long-term expected earnings per share (EPS) growth rate of 16.1% and carries a Zacks Rank #2.
Juniper Networks, Inc. (JNPR - Free Report) is a leading provider of networking solutions and communication devices. The company is engaged in developing, designing and selling network products globally. The Sunnyvale, CA-based currently has a long-term expected EPS growth rate of 9.5% and carries a Zacks Rank #2.
Morgan Stanley (MS - Free Report) is a leading financial services holding company headquartered in New York. The company serves a diversified group of clients including corporations, governments, financial institutions and individuals through more than 1,200 offices across 43 countries. The company has a long-term expected EPS growth rate of 9% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
VMware, Inc. is a Palo Alto, CA-based company engaged in providing virtualization and cloud infrastructure solutions in the U.S. and worldwide. The company has a long-term expected EPS growth rate of 12.7% with a Zacks Rank #2.
Lam Research Corporation (LRCX - Free Report) , based in Fremont, CA, is supplier of wafer fabrication equipment and services to the semiconductor industry worldwide. The company currently has a long-term expected EPS growth rate of 11.6% and carries a Zacks Rank #2.
Nordstrom Inc. (JWN - Free Report) , based in Seattle, WA, is a leading fashion specialty retailer, offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company currently has a long-term expected EPS growth rate of 9.7% and carries 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.
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.
Click here to sign up for a free trial to the Research Wizard today.
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 »