Steady sales growth is the key to survival for businesses in today’s fast changing and highly competitive operating backdrop. Hence, solid revenues are necessary to drive growth, and there is a strong relationship between sales growth and the value of an enterprise.
Though a company might not be profitable over a particular time period, it usually generates revenues. Notably, in cases when companies tend to incur a loss on a temporary basis, they are valued based on revenues and not on the bottom line. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance. The Price-to-Sales (P/S) ratio takes into account a company’s revenues when valuing it and is key stock selection criteria keeping in mind that management usually has limited opportunities to fiddle with revenues as they can with earnings. Thus, the P/S ratio is subject to lower manipulation than the Price-to-Earnings ratio. While sales growth is an important metric for any corporate for the purpose of growth projections and strategic decision-making, this alone doesn’t indicate much about a company’s prospects. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits. So, a consideration of a company’s cash position along with its sales number can be a more dependable strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and further potential investments. Most importantly, an adequate cash position suggests 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 25 stocks that qualified the screening: Headquartered in Birmingham, AL, Encompass Health Corporation ( EHC Quick Quote EHC - Free Report) is a provider of integrated healthcare services. Its expected sales growth rate for 2021 is 10.5%. The stock currently carries a Zacks Rank #2. Facebook, Inc. ( FB Quick Quote FB - Free Report) , based in Menlo Park, CA, is the world’s largest social media platform. The company’s expected sales growth rate for 2021 is 33.8%. It currently carries a Zacks Rank #2. Headquartered in Andover, MA, MKS Instruments, Inc. ( MKSI Quick Quote MKSI - Free Report) is a global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes. Its expected sales growth rate for 2021 is 24.2%. The stock sports a Zacks Rank #1 at present. Based in New York, The Blackstone Group Inc. ( BX Quick Quote BX - Free Report) is an asset manager of alternative investments and a provider of financial advisory services. Its expected sales growth rate for 2021 is 26.1%. The stock carries a Zacks Rank #2 at present. New York-based Interpublic Group of Companies Inc. ( IPG Quick Quote IPG - Free Report) provides advertising and marketing services worldwide. Its expected sales growth rate for 2021 is 7.1%. The stock sports a Zacks Rank #1 at present. 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