With markets in correction mode, it’s very difficult to select stocks that will offer steady returns going forward. Investors may apply complex investment strategies with an aim to book higher returns but may not be rewarded with the desired returns.
Thus, at present, investors should use conventional strategies, based on key fundamentals, to select stocks. One such strategy is focus on sales growth.
Why Sales Growth?
Investors often fail to keep an eye on sales growth while picking stocks, as a company’s share price is usually sensitive to its earnings momentum. Nonetheless, earnings are not the be-all and end-all in the sense that books can be easily manipulated. That’s why sales should always be taken into consideration.
Sales growth is actually an important indicator of a company's health and ability to sustain its business. It offers investors an insight into product demand and pricing power. The main advantage is that the sales figure is generally not manipulated and is less volatile than earnings.
Without some revenue growth, bottom-line improvement may not be sustainable in the longer term. While a company can show earnings strength by reducing expenses, a sustainable bottom-line recovery usually requires sales growth.
Focusing exclusively on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure profits. So, taking into consideration a company’s cash position along with its sales number can prove to be a more dependable strategy.
Substantial cash on hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
Selecting 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 20 stocks that qualified the screening:
Based in Seattle, WA, Starbucks (SBUX - Free Report) operates as a roaster, marketer, and retailer of specialty coffee. The company has expected sales growth rate of 10.6% for the current fiscal year and carries a Zacks Rank #2.
W.W. Grainger (GWW - Free Report) distributes maintenance, repair, and operating (MRO) supplies; and other related products and services. This Lake Forest, IL-based stock has expected sales growth rate of 5.8% for 2018 and sports a Zacks Rank #1.
Synchrony Financial (SYF - Free Report) , based in Stamford, CT, operates as a consumer financial services company. Its current year expected sales growth rate is 9.7% and the stock carries a Zacks Rank #2.
Headquartered in Fort Worth, TX, American Airlines Group (AAL - Free Report) operates as a network air carrier. The company has expected sales growth rate of 6.9% for 2018 and carries a Zacks Rank #2.
Broadridge Financial Solutions (BR - Free Report) provides investor communications and technology-driven solutions. This Lake Success, NY-based company’s sales are expected to grow at the rate of 3.6% for 2018 and the stock has 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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