With ever changing market dynamics, investors are often lured into undertaking complex investment strategies. But this may not yield the desired results always. Therefore, using conventional strategies based on key fundamentals to select stocks is always a safe and sound approach for ensuring steady returns.
Among several rational and down-to-earth investment strategies, we picked one that is focused on the sales growth of a company. Steady sales growth is the key to survival for a business.
Flat or declining sales growth shows obstacles at the company, which will limit scope for sustained growth. Stagnant companies may generate profits for a short period, but they do not ensure enough growth to attract new investors.
Revenues are often more closely monitored than earnings when assessing the growth of a business. It’s worth keeping in mind that in cases when companies incur a loss, albeit temporarily, they are valued on their revenues, as top-line growth (or decline) is usually an indicator of a company’s future performance.
So, the Price-to-Sales (P/S) ratio can turn out to be an apt metric for stock valuation. This metric’s importance further lies in the fact that management has limited opportunities to manipulate revenues unlike earnings.
Focusing solely on sales growth is, however, not desirable. A consideration of a company’s cash position along with its sales number can 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 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 16 stocks that qualified the screening:
Based in Bethesda, MD, Marriott International, Inc. MAR operates, franchises and licenses hotels and timeshare properties. The company has expected sales growth rate of 32.9% for the current year and carries a Zacks Rank #2.
Western Digital Corporation WDC develops, manufactures, and sells data storage devices and solutions. This San Jose, CA-based stock has expected sales growth rate of 7.5% for fiscal 2018 and sports a Zacks Rank #1.
Morgan Stanley MS, based in New York, provides various financial products and services. Its current year expected sales growth rate is 8.5% and the stock carries a Zacks Rank #2.
Headquartered in Atlanta, GA, The Southern Company SO is engaged in the generation, transmission, and distribution of electricity. The company has expected sales growth rate of 13.4% for this year and carries a Zacks Rank #2.
TransUnion TRU offers risk and information solutions. This Chicago, IL-based company’s current year sales are expected to grow at the rate of 12.4% and the stock has 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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