Solid sales growth is one of the most important characteristics of winners in the stock market. The companies that put more emphasis on sales management have a competitive advantage, as strong sales generally get converted into growth.
Revenues are often more closely monitored than earnings when assessing the growth of a business. This is because investors want to ensure that the business has the capability of generating more sales over time.
Flat or declining sales indicate obstacles for the company and limit the scope for sustained growth. Companies with top-line pressure may generate near-term profit but that doesn’t ensure enough growth to attract investors.
Without impressive top-line growth, the bottom-line improvement may not be sustainable over the longer term. While a company can show earnings strength by lowering costs, sustainable growth in the bottom line usually requires robust sales performance.
However, sales growth alone doesn’t indicate much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number is not necessarily translated into profits.
So, taking a company’s cash position along with its sales number into consideration can prove to be a more dependable strategy. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and potential investments. Also, an adequate cash position suggests 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 16 stocks that qualified the screening:
Nexstar Broadcasting Group, Inc. (NXST - Free Report) , based in Irving, TX, operates as a television broadcasting and digital media company. It’s expected sales growth rate for 2019 is 8.9%. The stock carries a Zacks Rank #2.
Based in San Diego, CA, ResMed Inc. (RMD - Free Report) develops, manufactures, distributes and markets medical devices and cloud-based software solutions. Expected sales growth rate for fiscal 2020 is 10.6%. The stock carries a Zacks Rank #2.
Lam Research Corporation (LRCX - Free Report) , headquartered in Fremont, CA, designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. Its expected sales growth rate for fiscal 2020 is 1.8%, and the stock carries a Zacks Rank #2.
Headquartered in Greensboro, NC, Qorvo, Inc. (QRVO - Free Report) provides radio frequency solutions and technologies. The company’s expected sales growth rate for 2019 is 2.2%, and it sports a Zacks Rank #1.
Northrop Grumman Corporation (NOC - Free Report) operates as a security company. This Falls Church, VA-based company’s sales are expected to increase 12.9% in 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