With the ever-changing market dynamics, investors are often tempted to undertake complex investment strategies. But this sometimes may not yield the desired results. So, using conventional strategies, which are based on key fundamentals to select stocks, is always a safe approach to earn sustainable return.
Among several rational and down-to-earth investment strategies, sales growth is one of the most favored.
A steady sales growth is the key to survival for a business in today’s highly competitive environment. Flat or declining sales growth shows obstacles at the company, which will limit scope for sustained growth. Stagnant companies may generate profits for a short period, but they do not ensure enough growth to attract new investors.
Revenues are often more closely monitored than earnings when assessing growth of a business. It’s worth keeping in mind that in cases when companies incur a loss, albeit transitorily, they are valued on their revenues. This is because top-line growth (or decline) is usually an indicator of a company’s future performance.
Therefore, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. This metric’s importance further lies in the fact that management has limited opportunities to manipulate revenues, unlike earnings.
Focusing solely on sales growth is, however, not a wise thing to do. 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 investments.
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. 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:
Based in Orrville, OH, The J. M. Smucker Company (SJM - Free Report) manufactures and markets branded food and beverage products. Expected sales growth rate for fiscal 2019 is 7% 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 and healthcare industries. This Windsor, CT-based company’s expected sales growth rate for 2019 is 37.1% and it sports a Zacks Rank #1.
Fifth Third Bancorp (FITB - Free Report) , headquartered in Cincinnati, OH, is a diversified financial services company. Its expected sales growth rate for 2019 is 5.9%. The stock carries a Zacks Rank #2, at present.
Equinix, Inc. (REIT) (EQIX - Free Report) connects the world's leading businesses to their customers, employees and partners inside the most-interconnected data centers. This Redwood City, CA-based company’s sales are expected to increase at the rate of 9.5% in 2019. The stock currently carries a Zacks Rank #2.
Headquartered in Portland, ME, WEX Inc. (WEX - Free Report) provides corporate card payment solutions. This Zacks Rank #2 company’s expected sales growth rate for 2019 is 13.9%.
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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