Strong sales growth is the key to survival for any business, particularly in the current market scenario that is characterized by changing customer preferences, demographic variations and stiff competition. Sales growth as such remains an important measure for any corporate house, as it is vital to growth projections and strategic decision making.
However, when it comes to picking stocks, investors often fail to consider sales growth as a dependable metric. This might be because of investors’ preconceived notion that a company’s stock price is typically sensitive to its earnings momentum.
Nevertheless, it’s worth keeping in mind that in cases where companies incur a loss, albeit transitorily, they are valued on their revenues, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance. Further, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, superior profits could be achieved through continued revenue growth.
Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. This metric’s importance lies in the fact that management has limited opportunities to manipulate revenues unlike earnings.
While sales growth provides investors an insight into product demand and pricing power, it doesn’t indicate whether the company is operating efficiently. A huge sales number does not necessarily convert into profits. Hence, considering 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 investments.
Bet Like a Pro
A careful selection of stocks considering certain factors should help investors to not only build wealth but beat the market as well.
In order to shortlist stocks that have witnessed 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 the 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. 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 (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.
Operating Margin (Average Last 5 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 for the company.
Return on Equity (ROE) greater than 5%: This metric will ensure that sales growth is being translated into profits and the company is not hoarding cash. A 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 five of the nine stocks that made it through the screen:
Regeneron Pharmaceuticals, Inc. (REGN - Free Report) is a biopharmaceutical company engaged in discovering, inventing, developing, manufacturing and commercializing medicines for the treatment of severe medical conditions globally. This Tarrytown, NY-based company has a long-term expected EPS (earnings per share) growth rate of 22.6% and carries a Zacks Rank #2.
Nordstrom Inc. (JWN - Free Report) , based in Seattle, WA, is a leading fashion specialty retailer, offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company currently has a long-term expected EPS growth rate of 9.7% and carries a Zacks Rank #2.
Intel Corporation (INTC - Free Report) , one of the world’s leading producers of semiconductor components, currently has a long-term expected EPS growth rate of 7.8%. This Santa Clara, CA-based company holds a Zacks Rank #2.
Nu Skin Enterprises Inc. (NUS - Free Report) is engaged in the development and distribution of consumer products, offering beauty and wellness solutions under its Nu Skin personal care, Pharmanex nutrition brand and ageLOC anti-aging category brands in over 50 markets worldwide. The Provo, UT-based firm has a long-term expected EPS growth rate of 8.1% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Priceline Group Inc. (PCLN - Free Report) is engaged in providing online travel & related services to customers worldwide through its six major brands including Booking.com, priceline.com, KAYAK, and OpenTable. This Norwalk, CT-based company has a long-term expected EPS growth rate of 18.3% and a Zacks Rank #2.
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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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