Persistent 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 as well.
From investors’ perspective, sales growth remains a key measure as well. Here, we have crafted a meticulous stock picking strategy that is primarily focused on sales growth of a company.
Often, investors 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 make sure that not only sales numbers are increasing but are accelerating as well. Precisely, sales growth rate in the current year should exceed the prior year’s sales 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.
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 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.
Strategy to Bet on
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 17 stocks that made it through the screen:
VMware, Inc. (VMW - Free Report) is a Palo Alto, CA-based company engaged in providing virtualization and cloud infrastructure solutions in the U.S. and worldwide. The company has a long-term expected earnings per share (EPS) growth rate of 12.7% with a Zacks Rank #2.
Juniper Networks, Inc. (JNPR - Free Report) , based in Sunnyvale, CA, is engaged in designing, developing, and selling network products and services globally. The company currently has a long-term expected EPS growth rate of 9.5% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Foot Locker, Inc. (FL - Free Report) , one of the world’s leading providers of athletic footwear and apparel, operates around 3,400 stores in 23 countries across North America, Europe, Australia, and New Zealand. This New York, NY-based company has a long-term expected EPS growth rate of 9.9% with a Zacks Rank #2.
Lincoln National Corporation (LNC - Free Report) involves in multiple insurance and retirement businesses in the U.S., which include fixed and indexed annuities, variable annuities, universal life insurance (UL), variable universal life insurance (VUL), linked-benefit UL, mutual funds and group life insurance. This Radnor, PA-based company has a long-term expected EPS growth rate of 7.8% with a Zacks Rank #2.
Morgan Stanley (MS - Free Report) is a leading financial services holding company headquartered in New York. With around 55,256 employees, the company serves a diversified group of clients including corporations, governments, financial institutions and individuals through more than 1,200 offices across 43 countries. The company has a long-term expected EPS growth rate of 6.9% 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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