Strong sales growth is one of the most important characteristics of potential winners in the stock market. The companies that put more emphasis on sales management have a competitive advantage, as strong sales generally get converted into growth.
Revenues are often more closely monitored than earnings when assessing the growth of a business. This is because investors want to make sure whether a business has the capability of generating more sales over time to cater to an expanding customer base.
Flat or declining sales growth indicates obstacles at the company and offers limited scope for sustained growth. Stagnant companies may generate near-term profit, but do not ensure enough growth to attract new investors.
Without impressive top-line growth, the bottom-line improvement may not be sustainable over the longer term. While a company can show earnings strength by reducing expenses, a sustainable bottom-line recovery usually requires robust sales growth.
However, sales growth in isolation doesn’t indicate much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number is not necessarily translated into profits.
Therefore, taking into consideration a company’s cash position along with its sales number can prove to 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 potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
The Winning Strategy
In order to shortlist stocks that have impressive sales growth along with a high cash balance, we added 5 Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our primary screening parameters.
However, sales growth and cash strength are not absolute criteria for selecting stocks. So, we added a few other factors to arrive at a winning strategy.
Price to Sales (P/S) Ratio less than X-Industry: This metric measures the value placed on each dollar of a company’s revenues. A lower ratio is considered better for picking stock since the investor is paying less for each unit of sales.
% Change F1 Sales Estimate Revisions (4 Weeks) greater than X-Industry: An upside estimate revision has often been observed to trigger an increase in the stock price.
Return on equity (ROE) greater than 5%: This metric will ensure that the sales growth is getting translated into profits and the company is not sitting idle on hoards of cash. High ROE means 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.
Here are seven of the sixteen stocks that qualified the screening:
Affiliated Managers Group Inc. (AMG - Free Report)
Newell Brands Inc. (NWL - Free Report)
Hasbro Inc. (HAS - Free Report)
Lear Corp. (LEA - Free Report)
FedEx Corporation (FDX - Free Report)
Total System Services, Inc. (TSS - Free Report)
Alleghany Corporation (Y - Free Report)
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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
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