There is an age-old Wall Street saying “uncertainty is the enemy of investors.” Therefore, selecting stocks based on key fundamentals is always prudent. Conventional strategies are not only safe, but are also worthwhile in the present volatile and uncertain market conditions. One such strategy is to focus on sales growth.
A healthy business with stable sales growth is vital for survival in today’s fast changing and highly competitive operating environment. Hence, superior revenues are required to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Revenues 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. So, in cases when companies tend to incur a loss temporarily, they are valued on the basis of revenues. 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 any corporate for the purpose of growth projections and strategic decision-making, this in isolation doesn’t indicate too much about a company’s future financial 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. Also, an adequate cash position suggests 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 18 stocks that qualified the screening:
The Hershey Company (HSY - Free Report) manufactures and sells confectionery products. This Hershey, PA-based company’s expected sales growth rate for 2019 is 1.7% and it carries a Zacks Rank #2.
Based in Bellevue, WA, T-Mobile US, Inc. (TMUS - Free Report) provides mobile communications services. Expected sales growth rate for 2019 is 4.8% and the stock sports a Zacks Rank #1.
SunTrust Banks, Inc. (STI - Free Report) , headquartered in Atlanta, GA, provides various financial and banking services. Its expected sales growth rate for 2019 is 3.7%. The stock carries a Zacks Rank #2, at present.
Headquartered in Chicago, IL, Hill-Rom Holdings, Inc. (HRC - Free Report) operates as a medical technology company. This Zacks Rank #2 company’s expected sales growth rate for fiscal 2019 is 1.4%.
VMware, Inc. (VMW - Free Report) provides compute, cloud, mobility, networking, and security infrastructure software. This Palo Alto, CA-based company’s sales are expected to increase at the rate of 21.2% for fiscal 2019. The stock carries a Zacks Rank #2.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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