Robust sales growth is one of the most important characteristics of potential 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 growth of a business. This is because investors want to make sure that the business has the capability of generating more sales over time.
Flat or declining sales increase indicates obstacles at the company and offers limited scope for sustained growth. Such companies may generate near-term profit, but do not ensure enough growth to attract new investors.
Without impressive top-line growth, bottom-line improvement may not be sustainable over the long term. While a company can show earnings strength by lowering costs, sustainable bottom-line improvement usually requires solid sales growth.
Nonetheless, sales growth alone doesn’t indicate much about a company’s prospects. Though it provides investors an insight into product demand and pricing power, a huge sales number is not always translated into profits.
So, taking into consideration a company’s cash position and its sales number can prove to 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 potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Selecting 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 22 stocks that qualified the screening:
Chipotle Mexican Grill, Inc. (CMG - Free Report) , based in Newport Beach, CA, operates quick-casual and fresh Mexican food restaurant chains. Its expected sales growth rate for 2020 is 12.4%. The stock carries a Zacks Rank #2.
Based in Boston, MA, Vertex Pharmaceuticals Incorporated (VRTX - Free Report) is engaged in developing and commercializing therapies for treating cystic fibrosis. Expected sales growth rate for 2020 is 25.7%. The stock carries a Zacks Rank #2.
San Diego, CA, ResMed Inc. (RMD - Free Report) develops, manufactures, distributes and markets medical devices and cloud-based software solutions that diagnose, treat and manage respiratory disorders. The company’s expected sales growth rate for 2020 is 11.3% and it sports a Zacks Rank #1.
Spirit Airlines, Inc. (SAVE - Free Report) , headquartered in Miramar, FL, provides low-fare airline services. Its expected sales growth rate for 2020 is 15.2%, and the stock sports a Zacks Rank #1.
OneMain Holdings, Inc. (OMF - Free Report) provides consumer finance and insurance products and services. This Evansville, IN-based company’s sales are expected to increase 9.3% in 2020. The stock sports a Zacks Rank #1.
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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