Investors often fail to think through sales growth as a dependable metric when it comes to picking winning stocks. This might be because of their preconceived notion that a company’s stock price is typically sensitive to its earnings momentum. However, betting on stocks completely depending on such a perception may not prove worthwhile.
It’s worth keeping in mind that in cases when companies incur a loss, albeit transitorily, they are valued based on their revenues not earnings, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance. In contrast with price to earnings and price to book value ratios, which can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
Further, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. But superior profits could be achieved through continued revenue growth.
Also, earnings and book value are largely influenced by several factors including accounting decisions tied with depreciation, significant charges and inventory. However, management has limited opportunities to manipulate sales, which further underscores the importance of P/S ratio.
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.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 15 stocks that qualified the screening:
Based in St. Petersburg, FL, Raymond James Financial, Inc. (RJF - Free Report) is engaged in the underwriting, distribution, trading, and brokerage of equity and debt securities, and the sale of mutual funds and other investment products. The company has expected sales growth rate of 14.1% for fiscal 2018 and carries a Zacks Rank #2.
Cognizant Technology Solutions Corporation (CTSH - Free Report) provides information technology, operations and technology consulting, infrastructure, and business process services. This Teaneck, NJ-based stock has expected sales growth rate of 9.3% for 2018 and carries a Zacks Rank #2.
Applied Materials, Inc. (AMAT - Free Report) , based in Santa Clara, CA, provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. Its fiscal 2018 expected sales growth rate is 16.2% and the stock sports a Zacks Rank #1.
Headquartered in Ewing, NJ, Church & Dwight Co., Inc. (CHD - Free Report) develops, manufactures, and markets household, personal care, and specialty products. The company has expected sales growth rate of 8.1% for 2018 and carries a Zacks Rank #2.
Total System Services, Inc. (TSS - Free Report) offers payment processing, merchant, and related payment services. This Columbus, GA-based company’s sales are expected to grow at the rate of 6.5% for 2018 and the stock has a Zacks Rank #2.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »