Sales growth is an important metric for any company, as it is a vital part of growth projections and influences strategic decision-making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
Sales growth is essential to justify the fixed and variable expenses incurred to run a business. Low revenues lead to unprofitability of business and disappointing financial results. Stagnant companies may generate near-term profit but can’t rev up enough growth to attract new investors.
Also, in a growing economy, lack of sales growth most likely denotes that the company is not gaining market share over its competitors. In simple terms, some sustained sales growth is necessary to support the bottom line.
Focusing solely 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. Hence, 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 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 it.
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 Kenosha, WI, Snap-on Incorporated (SNA - Free Report) manufactures and markets tools, equipment, diagnostics, and repairs information and systems solutions. Expected sales growth rate for the current year is 4% and the stock carries a Zacks Rank #2.
Polaris Industries Inc. (PII - Free Report) designs, engineers, manufactures, and markets power sports vehicles. This Medina, MN-based company’s expected sales growth rate for 2018 is 9.4% and it carries a Zacks Rank #2.
The Interpublic Group of Companies, Inc. (IPG - Free Report) , headquartered in New York, offers advertising and marketing services. Its current-year expected sales growth rate is 7.3% and the stock carries a Zacks Rank #2.
Headquartered in Palo Alto, CA, VMware, Inc. (VMW - Free Report) provides compute, cloud, mobility, networking, and security infrastructure software. The company’s expected sales growth rate for 2018 is 10.9% and it carries a Zacks Rank #2.
CBRE Group, Inc. (CBRE - Free Report) operates as a commercial real estate services and investment company. This Los Angeles, CA-based company’s sales are expected to increase at the rate of 40.7% 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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