In challenging times like these, finding stocks that are expected to record earnings growth in the near term can be a daunting task. Sustained sales growth is a parameter for selecting such stocks.
Sales growth is an important metric for any company, as it is vital for growth projections and helpful in strategic decision making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
In cases when companies incur loss, albeit temporarily, they are valued on the basis of revenues. Top-line growth (or decline) is usually an indicator of a company’s future earnings performance. While price to earnings and price to book value ratios can turn negative and cease to be relevant, the price-to-sales ratio is available even for firms that have hit choppy waters.
A company can improve earnings by resorting to cost-control measures, while maintaining stable revenues. However, superior profits can be achieved through steady revenue growth.
Huge sales numbers do not necessarily convert into profits. So, considering a company’s cash position, in addition to sales numbers, can prove to be more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
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 three of the seven stocks that qualified the screening:
Campbell Soup Company CPB — based in Camden, NJ — manufactures and markets food and beverage products. Its expected earnings growth rate for fiscal 2020 is 21.3%. The stock currently carries a Zacks Rank #2.
Based in Orrville, OH, The J. M. Smucker Company SJM manufactures and markets branded food and beverage products. Its expected earnings growth rate for fiscal 2021 is 1.1%. The stock carries a Zacks Rank #2 at present.
Irving, TX-based Vistra Energy Corp. VST is engaged in the electricity business. The company’s expected earnings growth rate for 2020 is 19.8% and it 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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Campbell Soup Company (CPB) : Free Stock Analysis Report
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