Investors often fail to consider sales growth as a dependable metric when it comes to selecting stocks. This might be because of their pre-conceived notion that a company’s stock price is typically sensitive to its earnings momentum. Yet, betting on stocks just depending on such a perception may not be worthwhile.
It must be kept in mind that in cases when companies incur a loss, though briefly, they are valued on the basis of their revenues not earnings, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance. Also, in contrast with price to earnings and price to book value ratios, which can turn negative and cease to be relevant, price-to-sales ratio is available even for firms that have hit choppy waters. Further, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, higher profits can be achieved through steady revenue growth. A huge sales number does not necessarily convert into profits. So, considering a company’s cash position along with its sales number can prove to be more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments. Picking 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 14 stocks that qualified the screening: Headquartered in Rye Brook, NY, Xylem Inc. ( XYL Quick Quote XYL - Free Report) is one of the leading providers of water solutions worldwide. Its expected sales growth rate for 2021 is 8.8%. The stock currently carries a Zacks Rank #2. Callon Petroleum Company ( CPE Quick Quote CPE - Free Report) , based in Houston, TX, is solely focused on exploration, and production of oil and gas resources in the Permian Basin. The company’s expected sales growth rate for 2021 is 34.7%. It currently sports a Zacks Rank #1. Headquartered in Stamford, CT, United Rentals, Inc. ( URI Quick Quote URI - Free Report) is the largest equipment rental company in the world, with an integrated network of 1,165 rental locations. Its expected sales growth rate for 2021 is 9.8%. The stock carries a Zacks Rank #2 at present. New York-based The Blackstone Group ( 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 28.3%. The stock carries a Zacks Rank #2 at present. Purchase, NY-based Atlas Air Worldwide Holdings, Inc. ( AAWW Quick Quote AAWW - Free Report) provides outsourced aircraft and aviation operating services. Its expected sales growth rate for 2021 is 17.2%. 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