Investors often undermine sales growth while picking stocks, as a company’s stock price is typically sensitive to its earnings momentum. However, earnings are quite vulnerable in the sense that books can be easily inflated. That’s why sales should always be considered.
Sales growth is actually an important indicator of a company’s health and ability to sustain its business. It provides investors insight into product demand and pricing power. The main advantage is that the sales figure is generally not manipulated and is less volatile compared to earnings.
Without some top-line growth, the 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 sales growth.
Focusing solely on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure 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 on hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
Choosing 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 13 stocks that qualified the screening:
New York-based
Tapestry, Inc.
TPR
is the designer and marketer of fine accessories and gifts for women and men. Its expected sales growth rate for fiscal 2021 is 6.3%. The stock sports a Zacks Rank #1 at present.
Headquartered in Greenwood Village, CO,
Newmont Corporation
NEM
is one of the world’s largest producers of gold with several active mines in Nevada, Peru, Australia and Ghana. Its expected sales growth rate for 2020 is 21.3%. The stock currently sports a Zacks Rank #1.
North Reading, MA-based
Teradyne, Inc.
TER
is a leading provider of automated test equipment. The company’s expected sales growth rate for 2021 is 34.2% and it currently carries a Zacks Rank #2.
Aarons, Inc.
AAN
, headquartered in Atlanta, GA, is a major omni-channel provider of lease-purchase solutions, mainly to underserved and credit-challenged customers. Its expected sales growth rate for 2020 is 6.5%. The stock sports a Zacks Rank #1 at present.
Headquartered in Waltham, MA,
PerkinElmer, Inc.
PKI
provides scientific instruments, consumables, and services to pharmaceutical, biomedical, environmental testing, chemical, and general industrial markets worldwide. Its expected sales growth rate for 2020 is 24.46%. The stock currently sports a Zacks Rank #1.
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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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