In today’s fast changing and highly competitive operating backdrop, solid sales growth is the key to survival for any business. But investors fail to see it as a dependable metric while picking stocks. This is largely due to the preconceived belief that a company’s stock price is generally sensitive to its earnings strength.
For any company, sales growth not only provides an understanding of product demand and pricing power, it is also important for growth projections and strategic decision making. If a company incurs loss in one particular quarter, then valuing it on the basis of sales growth offers an insight into its future performance. Also, a company can enhance earnings by resorting to cost control measures while maintaining stable revenues. However, sustainable bottom-line improvement invariably requires solid top-line growth. So, Price-to-Sales ratio turns 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 revenue figures, unlike earnings. Nonetheless, a large sales number does not automatically translate into profits. Therefore, it’s advisable 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 27 stocks that qualified the screening: Headquartered in Irving, TX, Celanese Corporation ( CE Quick Quote CE - Free Report) is a global hybrid chemical company, which produces chemical substances and materials. Its expected sales growth rate for 2021 is 23.3%. The stock currently sports a Zacks Rank #1. Berry Global Group, Inc. ( BERY Quick Quote BERY - Free Report) , based in Evansville, IN, manufactures and distributes nonwoven specialty materials, engineered materials and consumer packaging products in the market. The company’s expected sales growth rate for fiscal 2021 is 10.6%. It currently carries a Zacks Rank #2. Headquartered in Lake Forest, IL, W.W. Grainger Inc. ( GWW Quick Quote GWW - Free Report) is a broad line, business-to-business distributor of maintenance, repair and operating products, and services. Its expected sales growth rate for 2021 is 9.5%. The stock carries a Zacks Rank #2 at present. Dallas, TX-based Jacobs Engineering Group Inc. ( J Quick Quote J - Free Report) is one of the leading providers of professional, technical and construction services. Its expected sales growth rate for fiscal 2021 is 5.1%. The stock carries a Zacks Rank #2 at present. Cleveland, OH-based KeyCorp ( KEY Quick Quote KEY - Free Report) is a financial services company, which offers a wide range of products and services, like commercial and retail banking, commercial leasing, investment management, consumer finance as well as investment banking products. Its expected sales growth rate for 2021 is 3.4%. The stock carries a Zacks Rank #2 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