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Sales growth is an important metric for any company, as it is an important part of growth projections and is instrumental in strategic decision making. By observing this key metric over a period of time, one can clearly understand a company’s growth trend.
Sales growth is crucial to justify the fixed and variable expenses incurred to operate a business. Low revenues lead to an unprofitable business and unimpressive financial results. Stagnant companies may generate near-term profit, but accelerated growth is necessary to attract new investors.
Further, in an improving economy, lack of sales growth indicates that the company is not gaining market share over its competitors. In simple terms, some sustained sales growth is required to support profitability.
Focusing exclusively on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure profits. So, taking into consideration a company’s cash position along with its sales number can prove to be a more dependable strategy.
Strong liquidity position and steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
Selecting Winning Stocks
In order to shortlist stocks with impressive sales growth and 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. Hence, we have 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.
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 that 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 nine stocks that qualified the screening:
Headquartered in San Jose, CA, Broadcom AVGO is a premier designer, developer and global supplier of a broad range of semiconductor devices. Its expected sales growth rate for fiscal 2021 is 10.3%. The stock currently carries a Zacks Rank #2.
Headquartered in Westlake Village, CA, PennyMac Financial Services, Inc. PFSI is engaged in the mortgage banking and investment management activities. The company’s expected sales growth rate for 2020 is 151.4% and it currently sports a Zacks Rank #1.
ResMed RMD, headquartered in San Diego, CA, holds a major position as designer, manufacturer, as well as a distributor for generators, masks and related accessories for the treatment of sleep-disordered breathing and other respiratory disorders. Its expected sales growth rate for fiscal 2021 is 5.9%. The stock carries a Zacks Rank #2 at present.
San Francisco, CA-based Williams-Sonoma WSM is a multi-channel specialty retailer of premium quality home products. Its expected sales growth rate for fiscal 2021 is 10.6%. The stock sports a Zacks Rank #1 at present.
Based in Cleveland, OH, Parker-Hannifin PH is a global diversified manufacturer of motion & control technologies and systems. Its expected sales growth rate for fiscal 2022 is 8.9%. The stock currently 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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ResMed Inc. (RMD) : Free Stock Analysis Report
ParkerHannifin Corporation (PH) : Free Stock Analysis Report
WilliamsSonoma, Inc. (WSM) : Free Stock Analysis Report
Broadcom Inc. (AVGO) : Free Stock Analysis Report
PennyMac Financial Services, Inc. (PFSI) : Free Stock Analysis Report
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