A number of factors influence investment decisions, particularly when it comes to choosing stocks. While investors with a high-risk appetite looking for higher returns seek sophisticated and complex strategies, those with a low-risk appetite prefer conventional investment strategies based on solid fundamentals.
Conventional strategies can be banked upon in bearish markets as well. We have picked one such strategy that is focused on the sales growth of a company.
Sales Growth – A Key Financial Indicator
In the current market scenario, characterized by changing customer preferences and habits, evolving needs, demographic changes and an extremely competitive environment, continued sales growth is crucial for the survival of any business. Companies are always looking out for ways to boost their marketing initiatives to boost sales.
Sales are often more closely monitored than earnings when assessing the growth of a business. It’s worth keeping in mind that in cases where companies incur a loss, albeit temporarily, they are valued on their revenues, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance.
Hence, the Price-to-Sales (P/S) ratio can turn out to be a suitable metric for stock valuation. It remains a key stock selection criteria keeping in mind that management usually has limited opportunities to tamper with revenues as they can with earnings. Thus, the P/S ratio is subject to lesser manipulation than the Price-to-Earnings ratio.
Sales growth alone, however, cannot ensure success. Consideration of a company’s cash position along with its sales number can be a more reliable strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and investments.
Choosing the Winning Stocks
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added certain 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 16 stocks that qualified the screening:
Hasbro, Inc. (HAS - Free Report) operates as a play and entertainment company. This Pawtucket, RI-based company currently has long-term expected EPS growth rate of 11.7% and carries a Zacks Rank #2.
American Airlines Group Inc. (AAL - Free Report) , based in Fort Worth, TX, operates as a network air carrier. It has long-term expected earnings per share (EPS) growth rate of 2.8%. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Atlanta, GA, Intercontinental Exchange, Inc. (ICE - Free Report) operates regulated exchanges, clearing houses, and listings venues for financial and commodity markets. The company has a long-term expected EPS growth rate of 11.2% and carries a Zacks Rank #2.
Lam Research Corporation (LRCX - Free Report) designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits. This Fremont, CA-based company has a long-term expected EPS growth rate of 16.4% and a Zacks Rank #1.
Headquartered in Kalamazoo, MI, Stryker Corporation (SYK - Free Report) operates as a medical technology company. The company currently has a long-term expected EPS growth rate of 9.6% 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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