Consistent growth in sales is the key to survival for any business. For any company, sales growth not only provides an insight into product demand and pricing power, it is also 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. 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 24 stocks that qualified the screening: Headquartered in Yardley, PA, Crown Holdings, Inc. ( CCK Quick Quote CCK - Free Report) is a leading global manufacturer of packaging products for consumer goods. Its expected sales growth rate for 2021 is 5.9%. The stock currently carries a Zacks Rank #2. Rockwell Automation, Inc. ( ROK Quick Quote ROK - Free Report) , based in Milwaukee, WI, provides industrial automation and information solutions worldwide. The company’s expected sales growth rate for fiscal 2021 is 7.4% and it currently carries a Zacks Rank #2. Headquartered in Waltham, MA, PerkinElmer, Inc. ( PKI Quick Quote PKI - Free Report) provides scientific instruments, consumables, and services to pharmaceutical, biomedical, environmental testing, chemical, and general industrial markets worldwide. Its expected sales growth rate for 2021 is 10.8%. The stock sports a Zacks Rank #1 at present. Cleveland, OH-based KeyCorp ( KEY Quick Quote KEY - Free Report) offers commercial and retail banking, commercial leasing, investment management, consumer finance as well as investment banking products and services. Its expected sales growth rate for 2021 is 1%. The stock sports a Zacks Rank #1 at present. Tulsa, OK-based ONEOK Inc. ( OKE Quick Quote OKE - Free Report) is an energy company and engaged in natural gas and natural gas liquids businesses. Its expected sales growth rate for 2021 is 35.6%. The stock currently sports a Zacks Rank #1. 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