A healthy business with steady sales growth is the key to survival in today’s fast changing and highly competitive business environment. Yet, when it comes to picking stocks, investors often fail to consider sales growth as a dependable metric. This might be because of investors’ preconceived notion that a company’s stock price is typically sensitive to its earnings momentum.
But it’s worth keeping in mind that in cases when companies incur a loss, albeit transitorily, they are valued on their revenues, as top-line growth (or decline) is usually an indicator of a company’s future earnings performance.
Also, a company can improve earnings by resorting to cost control measures while maintaining stable revenues. However, a sustainable bottom-line growth consistently requires superior revenues.
Hence, the Price-to-Sales ratio can turn out to be an appropriate metric for stock valuation. This metric’s importance further lies in the fact that management has limited opportunities to manipulate revenues, unlike earnings.
While sales growth provides investors an insight into product demand and pricing power, it doesn’t indicate whether the company is operating efficiently. 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 investments.
Selecting Winning Stocks
In order to shortlist stocks with impressive sales growth and 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. Hence, we have 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.
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 that 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 10 stocks that qualified the screening:
Headquartered in Waltham, MA, PerkinElmer, Inc. PKI owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers and radiation oncology centers. Its expected sales growth rate for 2021 is 4.2%. The stock sports a Zacks Rank #1 at present.
Milpitas, CA-based KLA Corporation KLAC is an original equipment manufacturer of process diagnostics and control equipment, along with yield management solutions required for the fabrication of semiconductor integrated circuits or chips. The company’s expected sales growth rate for fiscal 2021 is 4.9% and it currently carries a Zacks Rank #2.
TransUnion TRU — headquartered in Chicago, IL — is global a provider of risk and information solutions to businesses and consumers. Its expected sales growth rate for 2021 is 7.3%. The stock carries a Zacks Rank #2 at present.
Based in King Of Prussia, PA, UGI Corporation UGI distributes, stores, transports and markets energy products, along with related services through its subsidiaries. Its expected sales growth rate for fiscal 2021 is 11.2%. The stock currently carries a Zacks Rank #2.
The Timken Company TKR, based in North Canton, OH, is manufacturer of bearings, friction management products and mechanical power transmission components. Its expected sales growth rate for 2021 is 7.1%. The stock currently 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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KLA Corporation (KLAC): Free Stock Analysis Report
PerkinElmer, Inc. (PKI): Free Stock Analysis Report
UGI Corporation (UGI): Free Stock Analysis Report
Timken Company The (TKR): Free Stock Analysis Report
TransUnion (TRU): Free Stock Analysis Report
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