Investors often fail to consider sales growth as a dependable metric when it comes to picking stocks. This might be because of their preconceived notion that a company’s stock price is typically sensitive to its earnings momentum. However, betting on stocks completely depending on such a perception may not prove worthwhile.
It must be kept in mind that in cases when companies incur a loss, albeit briefly, they are valued on the basis of revenues, and not earnings, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance. Notably, in contrast with price to earnings and price to book value ratios, which can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
Also, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, superior profits could be achieved through steady revenue growth.
A huge sales number does not necessarily convert into profits. So, considering a company’s cash position along with its sales number can prove to be more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
Selecting 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:
Headquartered in Chicago, IL,
LKQ Corporation
LKQ
is one of the leading providers of replacement parts, components and systems that are required to repair and maintain vehicles. Its expected sales growth rate for 2021 is 5%. The stock currently carries a Zacks Rank #2.
Celanese Corporation
CE
, based in Irving, TX, is a global hybrid chemical company, which produces chemical substances and materials. The company’s expected sales growth rate for 2021 is 16.4%. It currently sports a Zacks Rank #1.
Headquartered in Houston, TX,
Callon Petroleum Company
CPE
is solely focused on exploration, and production of oil and gas resources in the Permian Basin. Its expected sales growth rate for 2021 is 21.3%. The stock sports a Zacks Rank #1 at present.
Based in Windsor, CT,
SS&C Technologies Holdings, Inc.
SSNC
provides software products and software-enabled services to financial services and healthcare industries. Its expected sales growth rate for 2021 is 2.9%. The stock carries a Zacks Rank #2 at present.
Headquartered in Greensboro, NC,
Qorvo Inc.
QRVO
is a leading provider of core technologies and radio frequency solutions for mobile, infrastructure, as well as aerospace/defense applications. Its expected sales growth rate for fiscal 2022 is 11.4%. The stock carries a Zacks Rank #2 at present.
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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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