In challenging times like these, it’s not an easy task to find stocks that are expected to witness earnings growth in the near term. Therefore, one way to pick stocks is based on steady sales growth.
Sales growth is an important metric for any company, as it constitutes vital part of growth projections and is instrumental in strategic decision making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
When companies incur losses, although temporarily, they are valued based on their revenues. 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 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.
Huge sales numbers do not necessarily convert into profits. Hence, considering a company’s cash position, in addition to sales numbers, 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 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 16 stocks that qualified the screening:
Regency Centers Corporation REG, based in Jacksonville, FL, is the preeminent national owner, operator, and developer of shopping centers. Its expected sales growth rate for fiscal 2020 is 2.5%. The stock currently carries a Zacks Rank #2.
Based in San Diego, CA, ResMed Inc. RMD develops, manufactures, distributes, and markets medical devices and cloud-based software solutions that diagnose, treat, and manage respiratory disorders. Its expected sales growth rate for fiscal 2020 is 11.5%. The stock carries a Zacks Rank #2 at present.
Mountain View, CA-based Synopsys, Inc. SNPS provides electronic design automation software products. The company’s expected sales growth rate for fiscal 2020 is 7.4% and it currently carries a Zacks Rank #2.
Cboe Global Markets, Inc. CBOE, headquartered in Chicago, IL, operates as an options exchange. Its expected sales growth rate for 2020 is 10.6% and the stock carries a Zacks Rank #2 at present.
The Southern Company SO is engaged in the generation, transmission, and distribution of electricity. This Atlanta, GA-based company’s sales are expected to increase 3.3% in 2020. The stock carries a Zacks Rank #2, currently.
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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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Southern Company (The) (SO) : Free Stock Analysis Report
Cboe Global Markets, Inc. (CBOE) : Free Stock Analysis Report
ResMed Inc. (RMD) : Free Stock Analysis Report
Regency Centers Corporation (REG) : Free Stock Analysis Report
Synopsys, Inc. (SNPS) : Free Stock Analysis Report
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