Sales growth is an important metric for any company, as it is a vital part of growth projections and contributes to strategic decision-making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
Sales growth is essential to justify the fixed and variable expenses incurred to operate a business. Low revenues lead to an unprofitable business and negative financial results. Stagnant companies may generate near-term profit, but can’t accelerate enough growth to attract new investors.
Also, in a growing economy, lack of sales growth most likely indicates that the company is not gaining market share over its competitors. In simple terms, some sustained sales growth is required to support the bottom line.
But focusing solely on sales growth is not enough. 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. Sufficient 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 the Winning Stocks
In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added certain other factors to arrive at a winning strategy.
Price-to-Sales (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 (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 will ensure that sales growth is 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 14 stocks that qualified the screening:
Based in Hunt Valley, MD, Sinclair Broadcast Group, Inc. SBGI operates as a television broadcasting company. The company has long-term expected earnings per share (EPS) growth rate of 2% and carries a Zacks Rank #2.
Unum Group UNM provides group and individual disability insurance products and services. This Tarrytown, NY-based stock currently has long-term expected EPS growth rate of 7% and carries a Zacks Rank #2.
Omega Healthcare Investors, Inc. OHI, based in Hunt Valley, MD, is a real estate investment firm, which invests in healthcare facilities. It has long-term expected EPS growth rate of 3% and a Zacks Rank #2.
Huntington Ingalls Industries, Inc. HII engages in designing, building, overhauling, and repairing ships. This Newport News, VA-based company has a long-term expected EPS growth rate of 15% and a Zacks Rank #2.
Headquartered in Redwood City, CA, Electronic Arts Inc. EA develops, markets, publishes, and distributes games, content, and services. The company currently has a long-term expected EPS growth rate of 16.5% and 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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