Strong sales growth is one of the most important characteristics of potential winners in the stock market. The companies putting more emphasis on sales management have a competitive advantage, as strong sales generally get converted to growth.
Revenues are often more closely monitored than earnings when assessing growth of a business. This is because investors want to make sure whether a business has the capability of generating more sales over time to cater to an expanding customer base.
Flat or declining sales rise indicates obstacles for the company and offers limited scope for sustained growth. Stagnant companies may generate near-term profit, but do not ensure enough growth to attract new investors.
Without impressive top-line growth, bottom-line improvement may not be sustainable over the long term. While a company can show earnings strength by reducing expenses, a sustainable bottom-line recovery usually requires robust sales growth.
However, sales growth in isolation doesn’t indicate much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number is not necessarily translated into profits.
Hence, taking into consideration 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 potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Selecting the Potential Winners
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 ensures 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 18 stocks that qualified the screening:
Syneos Health, Inc. SYNH is an integrated biopharmaceutical solutions company. This Morrisville, NC-based company’s expected sales growth rate for 2019 is 6.9%, and it carries a Zacks Rank #2.
Based in Scottsdale, AZ, Carlisle Companies Incorporated CSL is a diversified manufacturing company. Expected sales growth rate for 2019 is 8.4%, and the stock carries a Zacks Rank #2.
United Technologies Corporation UTX, headquartered in Farmington, CT, provides technology products and services to building systems and aerospace industries. Its expected sales growth rate for 2019 is 16%, and the stock carries a Zacks Rank #2.
Headquartered in New York, Ares Capital Corporation ARCC is a business development company specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing and leveraged buyout transactions. The company’s expected sales growth rate for 2019 is 12.1%, and it carries a Zacks Rank #2.
Principal Financial Group, Inc. PFG provides retirement, asset management, and insurance products and services. This Des Moines, IA-based company’s sales are expected to increase at the rate of 10.4% 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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United Technologies Corporation (UTX) : Free Stock Analysis Report
Carlisle Companies Incorporated (CSL) : Free Stock Analysis Report
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INC Research Holdings, Inc. (SYNH) : Free Stock Analysis Report
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