Amid the daily roller-coaster ride in the stock market, there is no set rule for successful investing. However, knowledge of some of the basic strategies should help investors in taking smart investment decisions.
Among numerous stock-picking strategies, we chose a rational down-to-earth investment approach – one that focuses on the sales growth of a company.
Sales growth is an important measure for any corporate, as it is vital to growth projections and strategic decision-making. However, investors often fail to consider sales growth as a dependable metric when it comes to picking stocks. This might be because of their preconceived notion that a company’s stock price is typically sensitive to its earnings momentum.
Interestingly, revenues are often more closely monitored than earnings when assessing the growth of a business. It’s worth keeping in mind that when companies incur a loss, albeit transitorily, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance.
Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. Notably, this metric’s importance lies in the fact that management has limited opportunities to manipulate sales unlike earnings.
Focusing solely on sales growth is, however, not enough. Considering 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 investments.
The Right Strategy
A careful selection of stocks considering certain factors should help investors to not only build wealth but beat the market as well.
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we added 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our primary screening parameters.
However, sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added a few other factors to arrive at a winning strategy.
Price-to-Sales (P/S) Ratio less than X-Industry: This metric measures 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 (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.
Operating Margin (Average Last 5 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 the company.
Return on Equity (ROE) greater than 5%: This metric will ensure that sales growth is being 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.
Here are five of the 10 stocks that made it through the screen:
Spirit AeroSystems Holdings, Inc. SPR, based in Wichita, KS, is a leading producer of large aerostructures in the world. Its major products include fuselages, pylons and wing components. The company currently has a long-term expected EPS growth rate of 10.8% and carries a Zacks Rank #2.
Nordstrom Inc. JWN, based in Seattle, WA, is a leading fashion specialty retailer, offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company currently has a long-term expected EPS growth rate of 9.7% and carries a Zacks Rank #2.
Stifel Financial Corp. SF, financial services holding company engaged in offering an array of services including retail brokerage, securities trading, investment banking, retail, consumer, and commercial banking. This St. Louis, MO-based company has a long-term expected EPS growth rate of 12.0% with a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Take-Two Interactive Software, Inc. TTWO is engaged in developing, publishing and marketing of interactive entertainment for consumers worldwide. The company design products for console systems and personal computers, including tablets and smartphones. The New York –based company has a long-term expected EPS growth rate of 10.8% and carries a Zacks Rank #1.
Western Digital Corporation WDC, a Irvine, CA-based company engaged in developing, manufacturing, and selling data storage devices and solutions worldwide. The company has a long-term expected earnings per share (EPS) growth rate of 1.2% with a Zacks Rank #1.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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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WESTERN DIGITAL (WDC): Free Stock Analysis Report
SPIRIT AEROSYS (SPR): Free Stock Analysis Report
STIFEL FINL (SF): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
TAKE-TWO INTER (TTWO): Free Stock Analysis Report
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