Steady sales growth is the key to survival for businesses in today’s fast changing and highly competitive operating environment. Thus, superior 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 time period, it usually generates revenues unless there are unforeseen situations. In cases where companies tend to incur a loss on a temporary basis, they are valued based on revenues and not on earnings. 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 revenue when valuing it. Notably, it remains a key stock selection criterion keeping in mind that management usually has limited opportunities to fiddle with revenues as they 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.
Therefore, 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 further potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Picking 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 five of the 23 stocks that qualified the screening:
Headquartered in Abbott Park, IL,
Abbott Laboratories
ABT
discovers, develops, manufactures and sells a diversified line of health care products. Its expected sales growth rate for 2021 is 22.6%. The stock currently carries a Zacks Rank #2.
Facebook, Inc.
FB
, based in Menlo Park, CA, is the world’s largest social media platform. The company’s expected sales growth rate for 2021 is 26.1%. It currently sports a Zacks Rank #1.
Headquartered in New Britain, CT,
Stanley Black & Decker, Inc.
SWK
manufactures and provides tools and related accessories, healthcare solutions, electronic security solutions, engineered fastening systems, and many more items and services. Its expected sales growth rate for 2021 is 7.2%. The stock carries a Zacks Rank #2 at present.
Reston, VA-based
Leidos Holdings, Inc.
LDOS
is a global science and technology leader that serves the defense, intelligence, civil and health markets. Its expected sales growth rate for 2021 is 12%. The stock carries a Zacks Rank #2 at present.
Leawood, KS-based
Euronet Worldwide, Inc.
EEFT
is a leading electronics payments provider. Its expected sales growth rate for 2021 is 14.6%. The stock 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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