Sales growth is a vital 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, however, they need to show accelerated growth to attract new investors.
Further, in an improving economy, lack of sales growth most likely 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 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 22 stocks that qualified the screening:
Carlisle Companies Incorporated CSL operates as a diversified manufacturing company. This Scottsdale, AZ-based company’s expected sales growth rate for 2019 is 8.4%, and it sports a Zacks Rank #1.
Based in Falls Church, VA, Northrop Grumman Corporation NOC is a security company, which offers products in the areas of autonomous systems, cyber, space, strikes, and logistics and modernizations. Expected sales growth rate for 2019 is 12.7%, and the stock carries a Zacks Rank #2.
ResMed Inc. RMD, headquartered in San Diego, CA, develops, manufactures, distributes and markets medical devices and cloud-based software applications that diagnose, treat and manage respiratory disorders. Its expected sales growth rate for fiscal 2020 is 9.8%, and the stock carries a Zacks Rank #2.
Headquartered in Baltimore, MD, T. Rowe Price Group, Inc. TROW is a publicly owned investment manager. The company’s expected sales growth rate for 2019 is 4.4%, and it sports a Zacks Rank #1.
JetBlue Airways Corporation JBLU is a passenger carrier company, which provides air transportation services. This Long Island City, NY-based company’s sales are expected to increase at the rate of 6.8% 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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JetBlue Airways Corporation (JBLU) : Free Stock Analysis Report
Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
Carlisle Companies Incorporated (CSL) : Free Stock Analysis Report
T. Rowe Price Group, Inc. (TROW) : Free Stock Analysis Report
ResMed Inc. (RMD) : Free Stock Analysis Report
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