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Impressive Sales Growth Makes These 5 Stocks Worth Buying

Zacks Equity Research
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A healthy business with steady sales growth is key to survival in today’s fast changing and highly competitive business 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.

Though a company might not be profitable over a particular period, it usually generates revenues unless there are unforeseen situations. In cases when companies tend to incur a loss on a temporary basis, they are valued based on sales. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.

The Price-to-Sales (P/S) ratio takes into account a company’s revenues when valuing it. It is key stock selection criteria keeping in mind that management usually has limited opportunities to manipulate sales numbers as they can with earnings.

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, 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 further potential investments. Also, an adequate cash position suggests that revenues are being channelized in the right direction.

Picking 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.

Price-to-Sales (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 11 stocks that qualified the screening:    

Based in Los Angeles, CA, Oaktree Capital Group, LLC OAK operates as a global investment management firm that focuses on alternative markets. Expected sales growth rate for 2019 is 15.7% and the stock carries a Zacks Rank #2.

Synopsys, Inc. SNPS provides electronic design automation software products used to design and test integrated circuits. This Mountain View, CA-based company’s expected sales growth rate for fiscal 2019 is 6.6% and it sports a Zacks Rank #1.

Starbucks Corporation SBUX, headquartered in Seattle, WA, operates as a roaster, marketer, and retailer of specialty coffee. Its expected sales growth rate for fiscal 2019 is 6.3%. The stock carries a Zacks Rank #2, at present.

Stryker Corporation SYK operates as a medical technology company. This Kalamazoo, MI-based company’s sales are expected to increase at the rate of 8.8% in 2019. The stock carries a Zacks Rank #2.

Headquartered in New York, Ares Capital Corporation ARCC is a business development company. This Zacks Rank #2 company’s expected sales growth rate for 2019 is 4.3%.

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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