In today’s fast changing and highly competitive operating environment, solid sales growth is the key to survival of any business. But investors fail to see sales growth as a dependable metric while choosing stocks. This is because of the preconceived belief that a company’s stock price is generally sensitive to earnings strength.
For any company, sales growth not only provides an understanding of product demand and pricing power but also is important for growth projections and strategic decision making. In case a company incurs a loss in one particular quarter (albeit temporary), then valuing it on the basis of sales growth offers an insight into the future performance.
Also, a company can enhance earnings by resorting to cost-control measures while maintaining stable revenues. However, a sustainable bottom-line improvement invariably requires superior top-line growth.
Nonetheless, a large sales number does not automatically translate into profits. Therefore, it’s advisable to consider a company’s cash position along with sales number. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
Selecting Winning Stocks
In order to shortlist stocks with impressive sales growth and a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow more than $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for selecting stocks. Hence, we have added certain other factors to arrive at a winning strategy.
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 (four weeks) greater than X-Industry: Estimate revisions, better than the industry, are often seen to trigger an increase in stock price.
Operating Margin (average last five 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.
Return on Equity (ROE) greater than 5%: This metric will ensure that sales growth is translated into profits and the company is not hoarding cash. A high ROE means that 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 16 stocks that qualified the screening:
Take-Two Interactive Software, Inc. (TTWO - Free Report) — based in New York — is a leading developer and publisher of video games. Its expected sales growth rate for 2021 is 25.2%. The stock currently carries a Zacks Rank #2.
Headquartered in North Reading, MA, Teradyne Inc. (TER - Free Report) is a leading provider of automated test equipment. Its expected sales growth rate for 2021 is 3.9%. The stock sports a Zacks Rank #1 at present.
Stamford, CT-based United Rentals, Inc. (URI - Free Report) is the largest equipment rental company in the world. The company’s expected sales growth rate for 2021 is 4.7% and it currently sports a Zacks Rank #1.
Portland General Electric Company (POR - Free Report) — headquartered in Portland, OR — is an integrated electric utility company. Its expected sales growth rate for 2021 is 2.3%. The stock carries a Zacks Rank #2 at present.
Based in Lake Success, NY, Broadridge Financial Solutions, Inc. (BR - Free Report) is a global financial technology company that offers investor communications and technology-driven solutions to banks, broker-dealers, asset managers and corporate issuers. Its expected sales growth rate for fiscal 2021 is 2.4%. The stock currently 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.
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