Sales growth is an important measure for any corporate, as it is vital to growth projections and strategic decision making. Also, revenues are often more closely monitored than earnings when assessing the growth of a business.
It’s worth keeping in mind that when companies incur a loss, albeit transitorily, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance.
Therefore, the Price-to-Sales ratio can turn out to be an appropriate metric for stock valuation. Notably, this metric’s importance lies in the fact that management has limited opportunities to manipulate sales, unlike earnings.
Focusing solely on sales growth is, however, not enough. Considering a company’s cash position along with its sales number can prove to 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 investments.
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 nine stocks that qualified the screening:
Headquartered in New York,
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 1.7%. The stock sports a Zacks Rank #1 at present.
Chicago, IL-based
LKQ Corporation
LKQ
is one of the leading providers of replacement parts, components and systems that are required to repair and maintain vehicles. The company’s expected sales growth rate for 2021 is 5.8% and it currently sports a Zacks Rank #1.
Newmont Corporation
NEM
, headquartered in Greenwood Village, CO, is one of the world’s largest producers of gold. Its expected sales growth rate for 2021 is 19.2%. The stock sports a Zacks Rank #1 at present.
Based in Miami, FL,
Lennar Corporation
LEN
is engaged in homebuilding and financial services. Its expected sales growth rate for fiscal 2021 is 6.3%. The stock currently sports a Zacks Rank #1.
Southwest Gas Corporation
SWX
, based in Las Vegas, NV, purchases, distributes and transports natural gas. Its expected sales growth rate for 2021 is 6.8%. 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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