In today’s fast changing and highly competitive operating environment, solid sales growth is the key to survival for any business. But investors fail to see sales growth as a dependable metric while selecting stocks. This is owing to the preconceived belief that a company’s stock price is generally sensitive to its earnings strength.
For any company, sales growth not only provides an understanding of product demand and pricing power, it is important for growth projections and strategic decision making. In case a company incurs a loss in one particular quarter, then valuing it on the basis of sales growth offers an insight into the future performance.
Also, a company can enhance earnings by resorting to cost control measures while maintaining stable revenues. However, a sustainable bottom-line improvement invariably requires superior top-line growth.
Hence, Price-to-Sales (P/S) ratio turns out to be an appropriate metric for stock valuation. The importance of the metric lies in the fact that management has limited opportunities to manipulate revenue figures unlike earnings.
Nonetheless, a large sales number does not automatically translate into profits. Therefore, it’s advisable to consider a company’s cash position along with its sales number. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
Picking Up 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 greater 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 (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 14 stocks that qualified the screening:
Foot Locker, Inc. FL, based in New York, operates as an athletic shoes and apparel retailer. It has a long-term expected EPS growth rate of 9.71%. The company carries a Zacks Rank #2.
Teradyne, Inc. TER designs, develops, manufactures, sells, and supports automatic test equipment globally. This North Reading, MA-based company currently has a long-term expected EPS (earnings per share) growth rate of 11.15% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in St. Petersburg, FL, Raymond James Financial, Inc. RJF provides underwriting, distribution, trading, and brokerage of equity and debt securities services, and the sale of mutual funds and other investment products internationally. The company currently has a long-term expected EPS growth rate of 17% and a Zacks Rank #2.
CSX Corporation CSX, based in Jacksonville, FL, provides rail-based transportation services in the U.S. and Canada. The company has a long-term expected EPS growth rate of 13.75% and carries a Zacks Rank #2.
Unum Group UNM provides group and individual disability insurance products and services, primarily in the U.S. and the U.K. This New York based company has a long-term expected EPS growth rate of 7% and 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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CSX Corporation (CSX): Free Stock Analysis Report
Raymond James Financial, Inc. (RJF): Free Stock Analysis Report
Unum Group (UNM): Free Stock Analysis Report
Foot Locker, Inc. (FL): Free Stock Analysis Report
Teradyne, Inc. (TER): Free Stock Analysis Report
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