5 Stocks With Solid Sales Growth Worth Considering

A healthy business with stable sales growth is the key to survival in today’s fast changing and highly competitive environment. So, superior revenues are essential to drive growth. Most companies look for a strong relationship between sales growth levels and the value of an enterprise.

Revenues are income generated by a company through business activities. Though a company might not be profitable over a particular time period, it usually generates revenues unless there are unforeseen situations.

In cases when companies tend to incur a loss on a temporary basis, these are valued based on revenues and not on earnings. This is because sales growth (or decline) is usually an early indicator of the company’s future earnings performance.

While sales growth is an important metric for any corporation for the purpose of growth projections and strategic decision making, this in isolation does not reflect too much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, 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 further potential investments. Most importantly, an adequate cash position suggests that revenues are being channelized in the right direction.

Choosing the Winning Stocks

In order to shortlist stocks that have witnessed impressive sales growth along with a high cash balance, we have selected 5-Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our main screening parameters.

But sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added certain other factors to arrive at a winning strategy.

Price-to-Sales (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 (4 Weeks) greater than X-Industry: Better-than-industry estimate revision has often been seen to trigger an increase in the stock price.

Operating Margin (Average Last 5 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 for the company.

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.

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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.

Here are five of the 14 stocks that qualified the screening:

Based in Chattanooga, TN, Unum Group (NYSE:UNM) provides group and individual disability insurance products and services. The company has a long-term expected EPS growth rate of 7% and carries a Zacks Rank #2.

Teradyne, Inc. (NYSE:TER) designs, develops, manufactures, sells, and supports automatic test equipment. This North Reading, MA-based company currently has long-term expected EPS growth rate of 10% and carries a Zacks Rank #2.

Lam Research Corporation (NASDAQ:LRCX) , based in Fremont, CA, designs, manufactures, markets, refurbishes, and services semiconductor processing systems used in the fabrication of integrated circuits. It has long-term expected earnings per share (EPS) growth rate of 17.2%. The company sports a Zacks Rank #1. You can see Zacks Investment Research

Written By: Zacks Investment Research