Several domestic and international happenings in 2016 led to a roller coaster ride for the stock market and 2017 may not be a lot different. Particularly, the changing political environment might keep investors on tenterhooks.
Some key areas such as the policy changes under Donald Trump’s administration, the Fed’s actions on raising rates further, movement in oil price and of course the gradual effect of Brexit on the U.K., EU (European Union) and the overall global markets are expected to lead to volatility this year as well.
Ensuring steady returns while braving market volatility requires investment strategies that not only help to counter short-term market challenges but bode well for long-term investors. Among a number of such strategies, we picked one that is focused on the sales growth of a company.
Why Sales Growth?
A healthy business with steady sales growth is the key to survival in today’s fast changing and highly competitive business environment. As such, 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.
Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues unless there are unforeseen situations like a factory shut down, a strike and lack of human capital or any other resources required for products and services.
Notably, in cases when companies tend to incur a loss on a temporary basis due to short-term situations like product development stage, new entrant in a high-growth industry or paying higher taxes, companies 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 revenues when valuing it. Notably, it remains a key stock selection criteria 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.
Play Like a Champion
A huge sales number does not necessarily convert into profits. Hence, 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.
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we added 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our primary screening parameters.
However, sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added a few other factors to arrive at a winning strategy.
Price-to-Sales (P/S) Ratio less than X-Industry: This metric measures 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 (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.
Operating Margin (Average Last 5 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 the company.
Return on Equity (ROE) greater than 5%: This metric indicates whether sales growth is being 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.
Here are seven of the 13 stocks that made it through the screen:
Nordstrom Inc. JWN, based in Seattle, WA, is a leading fashion specialty retailer, offering high-quality apparel, shoes, cosmetics and accessories for men, women and kids. The company currently has a long-term expected EPS (earnings per share) growth rate of 8% and carries a Zacks Rank #2.
Morgan Stanley MS is a leading financial services holding company headquartered in New York. The company serves a diversified group of clients including corporations, governments, financial institutions and individuals through more than 1,200 offices across 43 countries. The company has a long-term expected EPS growth rate of 10.4% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Reinsurance Group of America, Incorporated RGA is a St. Louis, Missouri-based company engaged in providing life and health reinsurance and financial solutions. The company has a long-term expected EPS growth rate of 9% with a Zacks Rank #2.
UMB Financial Corporation UMBF, based in Kansas City, MO, is a financial holding company offering services including banking, payment solutions, asset servicing and institutional investment management. The company has a long-term expected EPS growth rate of 20.3% with a Zacks Rank #2.
Wintrust Financial Corporation WTFC, based in Rosemont, IL, is a financial holding company providing a wide range of services including banking, trust and investment services, commercial insurance premium financing and short-term accounts receivable financing. The company currently has a long-term expected EPS growth rate of 13.5% and carries a Zacks Rank #2.
First Midwest Bancorp Inc. FMBI, based in Itasca, IL, offers commercial, equipment financing, retail, wealth management, trust and private banking products and services. The company has a long-term expected EPS growth rate of 7% with a Zacks Rank #1.
State Street Corporation STT is major provider of financial services including investment servicing, investment management and investment research and trading to institutional investors. The Boston, MA-based company has a long-term expected EPS growth rate of 6.6% with a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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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