When it comes to picking stocks, employing a meticulous strategy with focus on low risk usually results in steady returns. While investors are often beguiled into undertaking complex investment strategies in a bid to book higher returns, this may not yield the desired results every time.
Hence, using conventional strategies, based on key fundamentals, to choose stocks is always wise. These strategies are not only safe but are also worthwhile in bearish markets. We have chosen one such strategy that is focused on sales growth.
Why Focus on Sales Growth?
Consistent sales growth is the key to survival for any business, particularly in today’s fast changing and highly competitive business environment. For any corporate house, sales growth not only provides an insight into product demand and pricing power, it is vital for growth projections and strategic decision making.
However, 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, investors should look for a strong relationship between sales growth levels and the value of an enterprise. This is because in cases where companies incur a loss, albeit transitorily, they are valued on their revenues not earnings, as top-line growth (or decline) is usually an indicator of a company’s future performance.
Also, investors should not only consider that sales figure is improving but also check whether it is accelerating. Precisely, sales growth rate in the current year should exceed prior-year levels.
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.
However, 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 more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
The Right Strategy
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 have 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 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 (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 fifteen stocks that made it through the screen:
Laboratory Corp. of America Holdings (LH - Free Report) is a leading healthcare diagnostics company, providing clinical laboratory services and drug development support. This Burlington, NC-based company currently has a long-term expected EPS (earnings per share) growth rate of 10.3% and carries a Zacks Rank #2.
Raymond James Financial, Inc. (RJF - Free Report) , a FL-based company in the investment brokerage space, has a long-term expected EPS growth rate of 17.0%. The company 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 sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Euronet Worldwide, Inc. (EEFT - Free Report) is a major player in providing payment and transaction processing solutions to clients including financial institutions, retailers and service providers worldwide. This Leawood, KS-based company has a long-term expected EPS growth rate of 14.8% and carries 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 carries 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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