While the naysayers warn of a crash every time the market
hiccups, it is evident that we are currently in one of the most
powerful and resilient bull markets we've seen in a long time. Five
years of cheap money, pumped-up stock prices and gradually
rebuilding investor confidence have powered the market to reach
some uncharted territories.
But how long can it last? Amid the melee between the bulls and the
bears, a layman investor might get lost. Choosing stocks that
promise earnings growth may not be enough to ensure returns if the
much-dreaded crash finally hits. And even if one manages to find
some stocks that have enough potential to hold ground, investing in
most them might not be that lucrative as most of them no longer
hold reasonable valuations.
Let's find some stocks using traditional indicators of stability
What Drives the Bottom Line?
Sales drive earnings, earnings drive the stock price. This
time-honored adage still holds true as an investment idea reviewed
in bare essentials.
Since the most recent recession hit six years ago, many companies
have slashed costs and restructured operations to become leaner and
more efficient. This has translated into improved profit margins,
leading to earnings growth despite sedated sales growth.
But earnings advancements based on margin expansion can outpace
sales growth for only so long. Over the long term, earnings growth
typically trails along the lines of revenue growth.
Companies have been aggressively chasing growth in recent times, as
evidenced by the spurt in mergers and acquisitions. Granted, the
companies had huge amounts of cash reserves, and the credit markets
were practically encouraging them to lever up. But the primary
reason remained the relentless pursuit of top-line growth that has
become harder and harder to come across in these tricky economic
Such behavior by the companies only serves to underline the
importance of robust revenue growth as a key metric to select
What Drives Revenues?
Consumer spending is a direct determinant of business sales. With
the GDP growing at an impressive rate of 4% in the second quarter,
the economy seems to be gaining momentum after shrinking 2.1% in
the previous quarter. The unemployment rate is steadily declining.
And as hiring picks up, consumer demand will follow suit.
Acceleration in wage growth could also boost consumer spending.
In fact, the country trade deficit for June shrank 7%, which could
imply a modest upward revision to the already strong second-quarter
GDP estimates. Most importantly, it prompts gutsy third-quarter GDP
As U.S. consumer spending accounts for over two-thirds of the
economic output, GDP expansion augurs well for organic growth of
the business community.
The Power of Industry Rank
Research indicates that about half the price performance of a stock
can be attributed to the industry group that it belongs to. Using a
sorting metric called Zacks Industry Rank, one can screen for
stocks that belong to the top-performing industries. A top Zacks
Industry Rank signifies that more stocks within that group are
likely to have upward earnings estimate revisions, implying bullish
outlook for the industry.
Historically too, we have found that the top 50% of Zacks-Ranked
Industries outperform the bottom 50% by a factor of more than 2 to
1. So it's a good idea to leverage the Zacks Industry Rank to
Growth & Valuation Metrics
Apart from a strong track record of sales growth and a robust
industry rank, one should look for companies with strong long-term
growth expectations. This should help select companies with strong
earnings potential driven by revenue growth.
We have shortlisted three stocks based on the above metrics and
incorporating valuation multiples. All these stocks are trading at
a discount to their respective peer group average forward P/E and
Lithia Motors Inc. (
Lithia Motors is a leading automobile retailer and automotive
franchisee in the U.S., serving both urban and rural markets. With
the auto market continuing to enjoy robust momentum, Lithia Motors
is displaying healthy growth across its segments.
The auto dealer has been on an acquisition spree lately,
acquiring/opening eight stores so far this year. The acquisitions
of Vic Alfonso Cadillac, Braley & Graham Buick GMC and Access
Ford Lincoln are expected to add $165 million annually to its
revenues. The company is also set to acquire DCH Auto Group Inc.,
which will augment revenues by $2.3 billion approximately per
The Retail/Wholesale Auto/Truck industry currently holds a Zacks
Industry Rank of 34 out of 265 industries, placing it in the top
Sales Growth in Previous Year = 20.8%
Long-Term Growth Consensus Estimate = 25%
P/E Ratio: 18.1; Peer Group P/E Ratio: 24.2
P/S Ratio: 0.5; Peer Group P/S Ratio: 1.0
Zacks Rank #1 (Strong Buy)
Constellation Brands Inc. (
Constellation Brands is a leading international producer and
marketer of beverage alcohol brands, boasting a formidable
portfolio of popular labels across the wine, spirits and imported
beer categories. The company is the largest multi-category alcohol
supplier in the U.S. and the largest wine company in the world.
The company's top-line has benefited from the consolidation of the
Crown Import business as well as robust demand for beer. Last year,
the company acquired Grupo Modelo's U.S. beer business for a sum of
$4.75 billion, boosting its sales by $2 billion in fiscal 2014.
Constellation's beer segment now represents about half of its total
sales; and it grew a strong 10% last year, on the back of new
product offerings, new points of distribution and effective
marketing and advertising strategies.
The Alcoholic Beverages industry currently holds a Zacks Industry
Rank of 34 out of 265 industries, placing it in the top 13%
Sales Growth in Previous Year = 72.6%
Long-Term Growth Consensus Estimate = 17.3%
P/E Ratio: 19.9; Peer Group P/E Ratio: 20.3
P/S Ratio: 3.0; Peer Group P/S Ratio: 13.7
Zacks Rank #2 (Buy)
Barrett Business Services Inc. (
Barrett Business Services, an outsourcing firm, provides business
management solutions, combining human resource outsourcing and
professional management consulting. With the company's brand
gaining more recognition, its client penetration is reaching
deeper, ranging from industries such as telecommunications and
transportation & shipping to manufacturing and food processing.
The company's commendable sales growth in recent times was
attributable to organic growth arising from existing client base as
well as strong referral channels. Also, the company's client
retention rate of over 90% indicates sustained revenue growth
acceleration, going forward.
The outsourcing industry currently holds a Zacks Industry Rank of
96 out of 265 industries, placing it in the top 36% bracket.
Sales Growth in Previous Year = 32.3%
Long-Term Growth Consensus Estimate = 22.5%
P/E Ratio: 18.8; Peer Group P/E Ratio: 20.1
P/S Ratio: 0.7; Peer Group P/S Ratio: 2.8
Zacks Rank #1
The crux remains that the top-line drives the bottom-line. A trend
of bottom-line growth consistently outpacing top-line growth in
most quarters has been a matter of concern throughout the recovery.
Companies have jacked up earnings for years by slashing costs.
However, going forward, it is clear that only companies with strong
revenue growth prospects can retain their earnings momentum and
augment shareholder wealth.
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CONSTELLATN BRD (STZ): Free Stock Analysis
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