In challenging times like these, it’s not an easy task to find stocks that are expected to report earnings growth in the near term. One reliable way is to choose stocks based on sales growth.
When companies incur loss, although briefly, they are valued based on their revenues and not earnings. Top-line growth (or decline) is usually an indicator of a company’s future earnings performance.
While price to earnings and price to book value ratios can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
A company can improve earnings by resorting to cost-control measures, while maintaining stable revenues. However, superior profits can be achieved through steady revenue growth.
Earnings and book value are largely influenced by several factors. However, management has limited opportunities to manipulate sales, which further underscores the importance of P/S ratio.
A huge sales number does not necessarily convert into profits. Hence, considering a company’s cash position and sales number can prove to be more prudent. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.
Selecting Winning Stocks
In order to shortlist stocks that have witnessed 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 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 17 stocks that qualified the screening:
The Clorox Company CLX, based in Oakland, CA, is engaged in the production, marketing and sale of consumer products. Its expected sales growth rate for fiscal 2020 is 1.6%. The stock sports a Zacks Rank #1.
Based in San Jose, CA, Western Digital Corporation WDC develops, manufactures, and sells data storage devices and solutions. Its expected sales growth rate for fiscal 2020 is 2%. The stock carries a Zacks Rank #2.
Reston, VA, Leidos Holdings, Inc. LDOS provides services and solutions in the defense, intelligence, civil and health markets. The company’s expected sales growth rate for 2020 is 16.3% and it carries a Zacks Rank #2.
Cincinnati Financial Corporation CINF, headquartered in Fairfield, OH, provides property casualty insurance products. Its expected sales growth rate for 2020 is 2.6% and the stock carries a Zacks Rank #2.
New Residential Investment Corp. NRZ focuses on investing in and managing residential mortgage-related assets. This New York-based company’s sales are expected to increase 25.7% in 2020. 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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Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report
Western Digital Corporation (WDC) : Free Stock Analysis Report
The Clorox Company (CLX) : Free Stock Analysis Report
Leidos Holdings, Inc. (LDOS) : Free Stock Analysis Report
New Residential Investment Corp. (NRZ) : Free Stock Analysis Report
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