Investors often overlook sales growth while selecting stocks, as a company’s stock price is typically sensitive to earnings momentum. However, earnings are quite vulnerable in the sense that books can be easily manipulated. That’s why sales should always be considered.
Sales growth is actually an important indicator of a company's health and ability to sustain the business. It provides investors an insight into product demand and pricing power. The main advantage is that sales figures are generally not rigged and are less volatile than earnings.
Without some top-line growth, bottom-line improvement may not be sustainable in the longer term. While a company can gain earnings strength by reducing expenses, a sustainable bottom-line recovery usually requires sales growth.
Focusing solely on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure profits. So, taking into consideration a company’s cash position along with sales numbers can prove to be a more dependable strategy.
Substantial cash on hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
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 17 stocks that qualified the screening:
Headquartered in King Of Prussia, PA, Universal Health Services, Inc. (UHS - Free Report) owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, as well as radiation oncology centers. Its expected sales growth rate for 2021 is 6%. The stock sports a Zacks Rank #1 at present.
Milpitas, CA-based KLA Corporation (KLAC - Free Report) is an original equipment manufacturer of process diagnostics and control equipment, along with yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company’s expected sales growth rate for fiscal 2021 is 4.9% and it currently carries a Zacks Rank #2.
PennyMac Financial Services, Inc. (PFSI - Free Report) — headquartered in Westlake Village, CA — is engaged in mortgage banking and investment management activities. Its expected sales growth rate for 2020 is 97%. The stock sports a Zacks Rank #1 at present.
Based in King Of Prussia, PA, UGI Corporation (UGI - Free Report) distributes, stores, transports and markets energy products, along with related services through its subsidiaries. Its expected sales growth rate for fiscal 2021 is 11.2%. The stock currently carries a Zacks Rank #2.
Qorvo, Inc. (QRVO - Free Report) — based in Greensboro, NC — is a leading provider of core technologies and radio frequency solutions for mobile, infrastructure and aerospace/defense applications. Its expected sales growth rate for fiscal 2021 is 4.6%. 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