With the commencement of third-quarter earnings, investors are picking stocks based on earnings strength. However, while it is easy to manipulate the bottom line through cost-cutting measures, sales growth comes in handy in gauging a company’s future financial performance.
Top line is the vital parameter for understanding 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 sales figures are generally not manipulated and are less volatile than earnings.
Sales growth is a key measure for any company, as it is important for earnings projections and strategic decision making. Without top-line growth, bottom-line improvement may not be sustainable in the long term.
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 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.
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 21 stocks that qualified the screening:
Williams-Sonoma, Inc. (WSM - Free Report) , based in San Francisco, CA, operates as a multi-channel specialty retailer of various products for home. The company’s expected sales growth rate for fiscal 2020 is 3.1%, and it carries a Zacks Rank #2.
Based in Round Rock, TX, Dell Technologies Inc. (DELL - Free Report) designs, develops, manufactures, markets, sells and supports information technology products and services. Expected sales growth rate for fiscal 2020 is 3%, and the stock carries a Zacks Rank #2.
T-Mobile US, Inc. (TMUS - Free Report) , headquartered in Bellevue, WA, provides mobile communications services. Its expected sales growth rate for 2019 is 4.6%, and the stock carries a Zacks Rank #2.
Headquartered in Irving, TX, Vistra Energy Corp. (VST - Free Report) is engaged in electricity business. The company’s expected sales growth rate for 2019 is 41.5%, and it carries a Zacks Rank #2.
Crown Castle International Corp. (CCI - Free Report) is a leading independent operator of wireless communication towers. This Houston, TX-based company’s sales are expected to increase at the rate of 8.3% for 2019. The stock sports a Zacks Rank #1.
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