Stable sales growth is the key to survival in today’s fast changing and highly competitive operating backdrop. So, superior revenues are vital for healthy business growth. Most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular period, it usually generates revenues unless there are unforeseen situations.
In cases when companies tend to incur loss on a temporary basis, these are valued based on revenues and not earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
While sales growth is an important metric for the purpose of growth projections and strategic decision making, this in isolation does not reflect much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits.
Therefore, 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 further potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Picking the Potential 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 24 stocks that qualified the screening:
AMETEK, Inc. AME manufactures and sells electronic instruments and electromechanical devices. This Berwyn, PA-based company’s expected sales growth rate for 2019 is 7.7%, and it carries a Zacks Rank #2.
Based in Reston, VA, Leidos Holdings, Inc. LDOS provides services and solutions in the defence, intelligence, civil and health markets. Expected sales growth rate for 2019 is 6%, and the stock carries a Zacks Rank #2.
T. Rowe Price Group, Inc. TROW, headquartered in Baltimore, MD, is an investment management company. It’s expected sales growth rate for 2019 is 4.8%, and the stock sports a Zacks Rank #1.
Headquartered in Chicago, IL, TransUnion TRU offers risk and information solutions. The company’s expected sales growth rate for 2019 is 13.5%, and it carries a Zacks Rank #2.
OneMain Holdings, Inc. OMF provides consumer finance and insurance products and services. This Evansville, IN-based company’s sales are expected to increase at the rate of 4.8% for 2019. 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
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TransUnion (TRU) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
OneMain Holdings, Inc. (OMF) : Free Stock Analysis Report
T. Rowe Price Group, Inc. (TROW) : Free Stock Analysis Report
AMETEK, Inc. (AME) : Free Stock Analysis Report
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