Investors often overlook sales growth while selecting stocks for investment purpose, as a company’s stock price is typically sensitive to its earnings growth. However, earnings are quite vulnerable in the sense that books can be easily manipulated and inflated. 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 provides investors an insight into product demand and pricing power. The main advantage is that the sales figure is generally not rigged and is less volatile than earnings.
Without some top-line growth, the bottom-line improvement may not be sustainable in the long term. While a company can show earnings strength by lowering expenses, a sustainable bottom-line recovery usually requires continued sales growth.
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.
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 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 33 stocks that qualified the screening:
Twitter (TWTR - Free Report) operates as a platform for public self-expression and conversation in real time. This San Francisco, CA-based company’s expected sales growth rate for 2018 is 22.1% and it sports a Zacks Rank #1.
Based in Bethesda, MD, Lockheed Martin (LMT - Free Report) is a security and aerospace company, which is engaged in the research, design, development, manufacture, integration and sustainment of technology systems, products and services. Expected sales growth rate for the current year is 3.9% and the stock carries a Zacks Rank #2.
Intercontinental Exchange (ICE - Free Report) , headquartered in Atlanta, GA, operates regulated exchanges, clearing houses and listings venues for financial and commodity markets. Its expected sales growth rate for 2018 is 6.3%. The stock carries a Zacks Rank #2, at present.
Headquartered in Los Angeles, CA, CBRE Group (CBRE - Free Report) operates as a commercial real estate services and investment company. This Zacks Rank #2 company’s expected sales growth rate for 2018 is 47.3%.
Keurig Dr Pepper (KDP - Free Report) is engaged in the brewing system and specialty coffee businesses. This Waterbury, VT-based company’s sales are expected to increase at the rate of 65.3% for 2018.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