Investors often fail to consider sales growth as a dependable metric when it comes to selecting stocks. This might be because of their preconceived notion that a company’s price performance is typically sensitive to its earnings momentum. But betting on stocks depending totally 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 on revenues and not earnings, as top-line growth (or decline) usually reflects a company’s future earnings performance. Notably, 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.
Also, a company can improve earnings by resorting to expense saving measures while maintaining stable revenues. However, superior profits could be achieved through continued revenue growth.
Further, earnings and book value are largely influenced by several factors including accounting decisions tied with depreciation, significant charges and inventory. But there are limited opportunities to manipulate sales, which further underscores the importance of P/S ratio.
A huge sales figure does not necessarily convert to 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.
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 more 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 (four weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in stock price.
Operating Margin (average last five 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 13 stocks that qualified the screening:
Based in Kalamazoo, MI, Stryker Corporation (SYK - Free Report) is a medical technology company. Expected sales growth rate for the current year is 9.3% and the stock carries a Zacks Rank #2.
SS&C Technologies Holdings, Inc. (SSNC - Free Report) offers software products and software-enabled services to financial services providers. This Windsor, CT-based company’s expected sales growth rate for 2018 is 100.8% and it carries a Zacks Rank #2.
Fifth Third Bancorp (FITB - Free Report) , headquartered in Cincinnati, OH, is a diversified financial services company. Its current-year expected sales growth rate is 9% and the stock sports a Zacks Rank #1.
Headquartered in Berwyn, PA, AMETEK, Inc. (AME - Free Report) manufactures and sells electronic instruments and electromechanical devices. The company’s expected sales growth rate for 2018 is 10.3% and it carries a Zacks Rank #2.
Xcel Energy Inc. (XEL - Free Report) is engaged mainly in the generation, purchase, transmission, distribution and sale of electricity. This Minneapolis, MN-based company’s sales are expected to grow at the rate of 3.4% for 2018 and the stock carries 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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