In the current bearish markets, investors often try to undertake complex investment strategies to generate solid returns. But this may not yield desired results all the time. So, using conventional strategies, based on key fundamentals to select stocks, is a safe and sound approach for making profits.
One such strategy is sales growth. Often overlooked by investors in favor of earnings, steady sales growth is vital for survival of business. While earnings are vulnerable in the sense that books can be easily manipulated and inflated, there are very less chances of inflating sales numbers.
The companies that put more emphasis on sales management have a competitive advantage, as strong sales generally get converted into growth. Flat or declining sales growth indicates obstacles and offers limited scope for sustained growth. Stagnant companies may generate near-term profit, but do not ensure enough growth to attract new investors.
Without impressive sales growth, bottom-line improvement will not be sustainable over the long term. While a company can show earnings strength by reducing expenses, a sustainable bottom-line recovery usually requires strong sales growth.
Nonetheless, sales growth in isolation 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.
Hence, taking into consideration a company’s cash position along with 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.
Picking 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.
Price-to-Sales (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 18 stocks that qualified the screening:
Synopsys, Inc. SNPS provides electronic design automation software products used to design and test integrated circuits. This Mountain View, CA-based company’s expected sales growth rate for fiscal 2019 is 6.3% and it sports a Zacks Rank #1.
Based in West Des Moines, IA, American Equity Investment Life Holding Company AEL provides life insurance products and services. Expected sales growth rate for the current year is 7.9% and the stock carries a Zacks Rank #2.
Monster Beverage Corporation MNST, headquartered in Corona, CA, develops, markets, sells, and distributes energy drink beverages, soda, and its concentrates. Its expected sales growth rate for 2018 is 12.3%. The stock carries a Zacks Rank #2, at present.
Headquartered in Berwyn, PA, AMETEK, Inc. AME manufactures and sells electronic instruments and electromechanical devices. This Zacks Rank #2 company’s expected sales growth rate for 2018 is 12.2%.
United Rentals, Inc. URI operates as an equipment rental company. This Stamford, CT-based company’s sales are expected to increase at the rate of 19.6% for 2018. 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
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Monster Beverage Corporation (MNST) : Free Stock Analysis Report
United Rentals, Inc. (URI) : Free Stock Analysis Report
Synopsys, Inc. (SNPS) : Free Stock Analysis Report
American Equity Investment Life Holding Company (AEL) : Free Stock Analysis Report
AMETEK, Inc. (AME) : Free Stock Analysis Report
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