Achieving growth is exceptionally challenging in today’s fast-changing operating environment. Hence, the companies have to step up marketing efforts over digital platforms and become more professional about sales management to drive their top line.
Technological evolvement further emphasizes the importance of sales and the need for the companies to apply the correct strategies and provide the right services to increase their sales.
Sales growth is a vital metric for any company as it is an important part of growth projections and influential in strategic decision making. So, sales should get more attention from investors in the investment process, as a healthy growth rate is usually a positive investment indicator.
Also, in cases where companies incur a loss on a temporary basis owing to short-term situations like product development stage, new entrant in a high-growth industry or paying higher taxes, they are valued based on revenues and not on earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
However, sales growth alone doesn’t reveal too much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily translate into profits.
Therefore, consideration of a company’s cash position along with its sales number can 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.
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 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 12 stocks that qualified the screening:
Teradyne, Inc. (TER - Free Report) designs, develops, manufactures, sells, and supports automatic test equipment. This North Reading, MA-based company currently has long-term expected earnings per share (EPS) growth rate of 10% and carries a Zacks Rank #2.
Raymond James Financial, Inc. (RJF - Free Report) , based in St. Petersburg, FL, is engaged in the underwriting, distribution, trading, and brokerage of equity and debt securities, and the sale of mutual funds and other investment products. It has long-term expected EPS growth rate of 17%. The company sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Chicago, IL, TransUnion (TRU - Free Report) provides risk and information solutions. The company has a long-term expected EPS growth rate of 10% and carries a Zacks Rank #2.
OneMain Holdings, Inc. (OMF - Free Report) provides consumer finance and insurance products and services. This Evansville, IN-based company has a long-term expected EPS growth rate of 10% and a Zacks Rank #2.
Headquartered in Hoboken, NJ, Newell Brands Inc. (NWL - Free Report) designs, sources, and distributes consumer and commercial products. The company currently has a long-term expected EPS growth rate of 12.1% 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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