Investors often do not consider sales growth as a dependable metric when it comes to selecting stocks. However, solid sales are necessary to drive growth, and most companies look for a strong relationship between sales growth levels and the value of an enterprise.
Sales 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.
In cases when companies tend to incur loss on a temporary basis, they are valued on the basis of revenues and not on earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.
While sales growth is an important metric for growth projections and strategic decision-making, this in isolation doesn’t indicate too much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number does not necessarily convert into profits.
Hence, 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 further potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.
Selecting 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 more 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.
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 for it.
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 21 stocks that qualified the screening:
BlackRock BLK is a publicly owned investment manager, which offers products that span the risk spectrum, including active, enhanced and index strategies. This New York-based company’s expected sales growth rate for 2019 is 1.3%, and it sports a Zacks Rank #1.
Based in Falls Church, VA, Northrop Grumman NOC provides products in the areas of autonomous systems, cyber, space, strikes, and logistics and modernizations. Expected sales growth rate for 2019 is 12.8%, and the stock carries a Zacks Rank #2.
The Progressive Corporation PGR, headquartered in Mayfield Village, OH, provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. Its expected sales growth rate for 2019 is 16.9%, and the stock carries a Zacks Rank #2.
Headquartered in New York, The Interpublic Group of Companies, Inc. IPG provides advertising and marketing services. The company’s expected sales growth rate for 2019 is 2.7%, and it carries a Zacks Rank #2.
Bristol-Myers Squibb BMY discovers, develops, licenses, manufactures, markets, distributes and sells biopharmaceutical. This New York-based company’s sales are expected to increase at the rate of 6.9% for 2019.The stock sports a Zacks Rank #1.
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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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Bristol-Myers Squibb Company (BMY) : Free Stock Analysis Report
Interpublic Group of Companies, Inc. (The) (IPG) : Free Stock Analysis Report
Northrop Grumman Corporation (NOC) : Free Stock Analysis Report
BlackRock, Inc. (BLK) : Free Stock Analysis Report
The Progressive Corporation (PGR) : Free Stock Analysis Report
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