Sales growth is a major financial indicator, which is often neglected by investors while searching for a profitable investment strategy. As the present market scenario is marked by changing customer preferences and habits, evolving needs, demographic changes and an extremely competitive environment, maintaining stable sales growth is vital for any company.
Companies are always looking for ways to boost revenues. Notably, revenues are often more closely monitored than earnings when assessing growth potential of a business.
It’s worth keeping in mind that in cases when companies incur a loss, albeit temporarily, they are valued on the basis of revenues, as top-line growth (or decline) is an indicator of a company’s future earnings performance.
So, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for valuing any company’s worth. It remains a major stock selection criterion as management usually has limited opportunities to manipulate revenues, unlike earnings.
Sales growth in isolation, however, does not assure success. A consideration of a company’s cash position along with its sales number can be a more dependable strategy. Substantial cash in hand and steady cash flow give a company more flexibility with respect to business decisions and investments.
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 13 stocks that qualified the screening:
Synchrony Financial SYF operates as a consumer financial services company. This Stamford, CT-based company’s expected sales growth rate for 2019 is 4.3%, and it carries a Zacks Rank #2.
Based in Berwyn, PA, AMETEK, Inc. AME manufactures and sells electronic instruments and electromechanical devices. Expected sales growth rate for 2019 is 8.4%, and the stock carries a Zacks Rank #2.
Stifel Financial Corp. SF, headquartered in St. Louis, MO, is a financial services and bank holding company. It’s expected sales growth rate for 2019 is 2.5%, and the stock sports a Zacks Rank #1.
Headquartered in Brentwood, TN, Delek US Holdings, Inc. DK is engaged in the integrated downstream energy business. The company’s expected sales growth rate for 2019 is 12.7%, and it carries a Zacks Rank #2.
American Water Works Company, Inc. AWK provides water and wastewater services. This Camden, NJ-based company’s sales are expected to increase at the rate of 5.7% for 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
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American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
Stifel Financial Corporation (SF) : Free Stock Analysis Report
Synchrony Financial (SYF) : Free Stock Analysis Report
Delek US Holdings, Inc. (DK) : Free Stock Analysis Report
AMETEK, Inc. (AME) : Free Stock Analysis Report
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