With the earnings season just about to commence, one must keep an eye on the financial performance of companies. An important metric worth noting is sales growth.
Solid sales are necessary to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise. Sales are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues.
In cases when companies tend to incur a loss on a temporary basis, they are valued on the basis of revenues and not on earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
While sales growth is an important metric for the purpose of growth projections and strategic decision-making, this in isolation doesn’t indicate too much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits.
Hence, a consideration of a company’s cash position along with its sales number can be a more dependable strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and further potential investments. Most importantly, an adequate cash position suggests 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: Estimate revisions, better than the industry, are often 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 18 stocks that qualified the screening:
American Axle & Manufacturing Holdings, Inc. (AXL - Free Report) designs, engineers, validates and manufactures driveline, metal forming, power train and casting products. This Detroit, MI-based company’s expected sales growth rate for 2018 is 15.6% and it sports a Zacks Rank #1.
Based in Horsham, PA, Toll Brothers, Inc. (TOL - Free Report) designs, builds, markets, and arranges finance for detached and attached homes in luxury residential communities. Expected sales growth rate for fiscal 2018 is 20.7% and the stock carries a Zacks Rank #2.
Raymond James Financial, Inc. (RJF - Free Report) , headquartered in St. Petersburg, FL, is engaged in the underwriting, distribution, trading and brokerage of equity and debt securities, as well as the sale of mutual funds and other investment products. Its expected sales growth rate for fiscal 2019 is 10.2% and the stock carries a Zacks Rank #2.
Headquartered in Wyomissing, PA, Gaming and Leisure Properties, Inc. (GLPI - Free Report) is engaged in the business of acquiring, financing and owning real estate property to be leased to gaming operators. The company’s expected sales growth rate for 2018 is 5.2% and it sports a Zacks Rank #1.
SS&C Technologies Holdings, Inc. (SSNC - Free Report) provides software products and software-enabled services to financial services providers. This Windsor, CT-based company’s sales are expected to increase at the rate of 103.5% for 2018.The stock sports 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