Amid ever changing market dynamics, investors are often beguiled into undertaking complex investment strategies. However, this sometimes may not yield the desired results. Hence, using conventional strategies, which are based on key fundamentals, to choose stocks is always a safe and sound approach for making profits.
Among numerous such stock-picking strategies, we have selected a rational down-to-earth investment approach – one that focuses on the sales growth of a company. However, investors often fail to consider sales growth as a dependable metric. This might be because of investors’ preconceived notion that a company’s stock price is typically sensitive to its earnings momentum.
Nevertheless, it’s worth keeping in mind that in cases where companies incur a loss, albeit transitorily, they are valued on their revenues, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance. Further, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, superior profits could be achieved through continued revenue growth.
Hence, the Price-to-Sales (P/S) ratio can turn out to be an appropriate metric for stock valuation. This metric’s importance lies in the fact that management has limited opportunities to manipulate revenues unlike earnings.
While sales growth provides investors an insight into product demand and pricing power, it doesn’t indicate whether the company is operating efficiently. A huge sales number does not necessarily convert into profits. Hence, 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 Winning 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 have 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 seven of the 16 stocks that made it through the screen:
Teradyne, Inc. TER, based in North Reading, MA, is engaged in designing, developing, manufacturing, and selling automatic test equipment worldwide. The company has a long-term expected earnings per share (EPS) growth rate of 13.3% and sports a Zacks Rank #1.
WEX Inc. WEX provides corporate payment solutions to a broad set of customers and partners with offices in the U.S., Australia, New Zealand, Brazil, the U.K., Italy, France, Germany, Norway and Singapore. The South Portland, ME-based company has a long-term expected EPS growth rate of 14.8% with a Zacks Rank #2.
UMB Financial Corporation UMBF, based in Kansas City, MO, is a financial holding company offering services including banking, payment solutions, asset servicing and institutional investment management. The company has a long-term expected EPS growth rate of 11% with a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lam Research Corporation LRCX, based in Fremont, CA, is supplier of wafer fabrication equipment and services to the semiconductor industry worldwide. The company currently has a long-term expected EPS growth rate of 12.3% and carries a Zacks Rank #2.
Foot Locker, Inc. FL, one of the world’s leading providers of athletic footwear and apparel, operates around 3,400 stores in 23 countries across North America, Europe, Australia, and New Zealand. This New York, NY-based company has a long-term expected EPS growth rate of 9.7% with a Zacks Rank #2.
Morgan Stanley MS is a leading financial services holding company headquartered in New York. The company serves a diversified group of clients including corporations, governments, financial institutions and individuals through more than 1,200 offices across 43 countries. The company has a long-term expected EPS growth rate of 12.8% and carries a Zacks Rank #2.
Lincoln National Corporation LNC involves in multiple insurance and retirement businesses in the U.S., which include fixed and indexed annuities, variable annuities, universal life insurance (UL), variable universal life insurance (VUL), linked-benefit UL, mutual funds and group life insurance. This Radnor, PA-based company has a long-term expected EPS growth rate of 8% with a Zacks Rank #2.
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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UMB Financial Corporation (UMBF): Free Stock Analysis Report
Morgan Stanley (MS): Free Stock Analysis Report
WEX Inc. (WEX): Free Stock Analysis Report
Lincoln National Corporation (LNC): Free Stock Analysis Report
Foot Locker, Inc. (FL): Free Stock Analysis Report
Lam Research Corporation (LRCX): Free Stock Analysis Report
Teradyne, Inc. (TER): Free Stock Analysis Report
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