A healthy business with steady sales growth is key to survival in today’s fast changing and highly competitive operating environment. Sales growth is an important measure for any corporate house, as it is vital to growth projections and strategic decision making.
It’s worth keeping in mind that when companies incur a loss for a temporary period, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance. In contrast with price to earnings and price to book value ratios, which can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
Also, profits and book value are largely influenced by several factors including accounting decisions tied with depreciation, significant charges and inventory. However, management has limited opportunities to rig sale numbers, which further underscores the importance of P/S ratio.
Therefore, P/S ratio can serve as a more reliable metric for stock valuation. But focusing solely on sales growth is not a wise decision.
One must take in to consideration a company’s cash position along with its sales number for a more dependable investment strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and investments. Most importantly, an adequate 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 20 stocks that qualified the screening:
Bristol-Myers Squibb Company (BMY - Free Report) , based in New York, discovers, develops, licenses, manufactures, markets, distributes and sells biopharmaceutical products. The company’s expected sales growth rate for 2019 is 7.6%, and it carries a Zacks Rank #2.
Based in Kalamazoo, MI, Stryker Corporation (SYK - Free Report) is a medical technology company. Expected sales growth rate for 2019 is 9.2%, and the stock carries a Zacks Rank #2.
Leidos Holdings, Inc. (LDOS - Free Report) , headquartered in Reston, VA, provides services and solutions in the defense, intelligence, civil, and health markets. Its expected sales growth rate for 2019 is 6.8%, and the stock carries a Zacks Rank #2.
Headquartered in New York, Ares Capital Corporation (ARCC - Free Report) is a business development company. The company’s expected sales growth rate for 2019 is 14.4%, and it carries a Zacks Rank #2.
Carlisle Companies Incorporated (CSL - Free Report) operates as a diversified manufacturing company. This Scottsdale, AZ-based company’s sales are expected to increase at the rate of 7.7% for 2019. 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