Markets

4 Dirt Cheap Stocks with Superb Sales Growth

Since the Great Recession, the U.S. economy has so far demonstrated decent progress, combating myriad challenges during the two-year long slump. The revival has been evident even in the equity markets, with companies progressing on earnings performances.

But earnings are not always a true reflection of a company's performance. Let's see why:

Companies that often fail to improve their fundamentals tend to target earnings loopholes so that they can manipulate the bottom line. They cut expenses at a rate much higher than the overall sales growth as well as their peers' expense reduction rates. Restructuring of the business, shrinking discretionary expenditures, staff lay-offs, store closures, divestment of non-core assets and share buybacks are some of the common methods deployed to attain such motives. These practices often lead to social diseconomies, and are hence, not sustainable in the long run.

Per a research by hbr.org, during the 2000 economic downturn, Sony, for a period of two years, continued with its strategy to inflate its bottom line, cutting its workforce by 11%, R&D expenditure by 12% and capital expenditure by 23%. The cuts helped Sony increase its profit margin from 8% in 1999 to 12% in 2002; but sales tumbled from an average growth rate of 11% in the pre-recessionary phase to 1% thereafter.

What's the Real Measure of a Company's Health?

The more appropriate metric in assessing a company's financial health and sustainability is its sales performance. The top line gives a truer reflection of a company's growth, taking into consideration the fact that there lie much lesser chances for manipulation. In fact, a combination of offensive and defensive strategies works better to brave an economic downturn. The focus should be on cost curtailment along with sales expansion through meaningful investment. So the parity of earnings growth with that of sales is very important.

Another Recession in the Cards?

Considering the overvaluation of the market at present, some economists believe that another slump is around the corner. According to them, stocks are already pricey, and the U.S. equity market is already trading at a higher valuation than most others. This indicates high chances of a big sell-off in the near- to mid-term.

In fact, look at the massive global market sell-off that took place yesterday (widely called 'Black Monday') leading to a 588-point plunge in the Dow Jones. Although this was mainly due to the global concerns, primarily the Chinese currency devaluation, this may point to issues within the U.S. market as well.

Which Stocks Should Brave the Downfall?

While the firms that have so far gained in the market solely on the basis of artificial earnings manipulation are going to be the biggest victims of this looming sell-off phase, those that have grown on top-line strength are expected to do well.

So it could be a good idea to look for stocks that have historically shown strong sales growth as well as are trading at a cheaper valuation.

With the help of the Zacks Rank and our style score system , we first shortlisted value stocks that can do wonders to your portfolio. We looks for stocks with Value Style Score of 'A' or 'B' and Zacks Rank #2 (Buy) or better. Back-tested results show that stocks with Value Style Scores of 'A' or 'B,' when combined with a Zacks Rank #1 (Strong Buy) or #2, offer the greatest investment opportunities. We then focused on those that have a price performance relative to sales better than the industry average.

Finally, we zeroed in on those that have a 5-year historical sales growth rate of more than 50%.

Here are the four stocks that we have identified for your consideration:

T-Mobile US, Inc.TMUS

T-Mobile is one of the leading wireless companies in the U.S. It provides wireless communications services, including voice, messaging and data, to over 55 million customers in the postpaid, prepaid and wholesale markets. The company continued to demonstrate strong sales growth over the past years by offering affordable wireless communication services coupled with a wide selection of wireless devices and accessories.

The key metrics are:

  • Zacks Rank #2
  • Value Style Score: 'B'
  • 5-year Historical Sales Growth: 71.5%
  • Price/Sales Ratio: 1.0

Brookfield Infrastructure Partners L.P.BIP

Brookfield Infrastructure Partners operates long-life, high quality infrastructure assets with high barriers to entry and low maintenance capital requirements that generate stable and growing cash flows. The company's portfolio of infrastructure assets primarily comprises utilities, transport, energy and communications infrastructure sectors, located in North and South America, Europe and Australia. The company continues to show robust top-line growth over the years on targeted acquisitions that add on to current operating platforms and extend into new geographies.

The key metrics are:

  • Zacks Rank #1
  • Value Style Score: 'B'
  • 5-year Historical Sales Growth: 54%
  • Price/Sales Ratio: 2.1

Sanchez Energy CorporationSN

This is an independent exploration and production company focused on the exploration, acquisition and development of unconventional oil and natural gas resources in the onshore U.S. Gulf Coast, with a current focus on the Eagle Ford Shale in South Texas andthe Tuscaloosa Marine Shale in Mississippi and Louisiana. By executing its 2014 capital plan and manufacturing process strategy, the company grew its production and reserves successfully over the last year.

The key metrics are:

  • Zacks Rank #2
  • Value Style Score: 'A'
  • 5-year Historical Sales Growth: 250.6%
  • Price/Sales Ratio: 0.5

Halcón Resources CorporationHK

This independent energy company working on onshore liquids-rich oil and natural gas assets had total $1.1 billion of operating revenues in 2014 with production exceeding the company's expectation.

The key metrics are:

  • Zacks Rank #2
  • Value Style Score: 'A'
  • 5-year Historical Sales Growth: 97.2%
  • Price/Sales Ratio: 0.5

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BROOKFIELD INFR (BIP): Free Stock Analysis Report

HALCON RESOURCS (HK): Free Stock Analysis Report

SANCHEZ ENERGY (SN): Free Stock Analysis Report

T-MOBILE US INC (TMUS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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