A healthy business with steady sales growth is the key to survival in today’s fast changing and highly competitive operating environment. As such, higher revenues are necessary to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues unless there are unforeseen situations.
In cases when companies tend to incur loss on a temporary basis, they are valued on the basis of revenues and not earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future performance.
The Price-to-Sales (P/S) ratio takes into account a company’s revenues while valuing it. The ratio remains a key stock selection criterion as management usually has limited opportunities to fiddle with revenues as it can with earnings. Thus, the P/S ratio is subject to lower manipulation than the Price-to-Earnings ratio.
While sales growth is an important metric for any corporate for the purpose of growth projections and strategic decision making, this 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 does not necessarily convert into profits.
So, a consideration of a company’s cash position along with its sales number can 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 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 14 stocks that qualified the screening:
Bristol-Myers Squibb Company BMY, based in New York, discovers, develops, licenses, manufactures, markets, distributes and sells biopharmaceutical products. Its expected sales growth rate for 2019 is 10.5%. The stock carries a Zacks Rank #2.
Based in Seattle, WA, Alaska Air Group, Inc. ALK provides passenger and cargo air transportation services. Expected sales growth rate for 2019 is 6.1%. 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 15.6%, and the stock carries a Zacks Rank #2.
Mountain View, CA, Synopsys, Inc. SNPS provides electronic design automation software products used to design and test integrated circuits. The company’s expected sales growth rate for 2019 is 8.2%, and it sports a Zacks Rank #1.
American Water Works Company, Inc. AWK provides water and wastewater services. This Camden, NJ-based company’s sales are expected to increase 4.7% in 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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Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
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United Technologies Corporation (UTX) : Free Stock Analysis Report
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