In a bullish market, selecting stocks is not an easy task. One might end up with overpriced and unprofitable stocks.
So, while choosing stocks, one should employ a meticulous strategy with focus on low risk stocks that usually provide steady returns. Nonetheless, at times, with an aim to book higher returns, investors apply complex investment strategies, which may not lead to the desired returns.
So, it’s advisable to use conventional strategies, based on key fundamentals, to choose stocks. Not only are such strategies safe, they are valuable in bearish markets as well. One such strategy is focus on sales growth.
Why Sales Growth?
Persistent growth in sales is the key to the survival of any business. For any company, sales growth not only provides an insight into product demand and pricing power, it is vital for growth projections and strategic decision making.
But investors often fail to consider sales growth as a dependable metric. This could be because of investors’ preconceived notion that a company’s stock price is generally sensitive to its earnings momentum.
However, it should be kept in mind that in case companies incurs a loss (albeit temporarily), these are valued on its revenues. Top-line growth (or decline) is generally an indicator of a company’s future earnings performance.
Also, in an improving economy, absence of sales growth indicates that the company’s market share is not increasing. Hence, some sustained sales growth is necessary to support the bottom line.
Therefore, Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. The importance of the metric lies in the fact that management has limited opportunities to manipulate revenues unlike earnings.
Nevertheless, a huge sales number does not always turn into profits. Hence, it’s more sensible to consider a company’s cash position along with its sales number. Substantial cash in hand and a steady cash flow provide a company more flexibility with respect to business decisions and investments.
Picking 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 16 stocks that qualified the screening:
Based in Pawtucket, RI, Hasbro, Inc. (HAS - Free Report) operates as a play and entertainment company. The company has long-term expected earnings per share (EPS) growth rate of 11.7% and carries a Zacks Rank #2.
Regeneron Pharmaceuticals, Inc. (REGN - Free Report) discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions. This Tarrytown, NY-based stock currently has long-term expected EPS growth rate of 21.1% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials, Inc. (AMAT - Free Report) , based in Santa Clara, CA, provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It has long-term expected EPS growth rate of 17.1% and sports a Zacks Rank #1.
Vantiv, Inc. (VNTV - Free Report) provides electronic payment processing services to merchants and financial institutions. This Cincinnati, OH-based company has a long-term expected EPS growth rate of 14.5% and a Zacks Rank #2.
Headquartered in Los Angeles, CA, CBRE Group, Inc. (CBG - Free Report) operates as a commercial real estate services and investment company. The company currently has a long-term expected EPS growth rate of 13% and a Zacks Rank #1.
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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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