Buy These 5 Stocks With Impressive Sales Growth Right Now
Zacks Investment Research | May 21, 2021 07:13AM ET
In today’s fast changing and highly competitive operating backdrop, solid sales growth is the key to survival for any business. But investors fail to see it as a dependable metric while picking stocks. This is largely due to the preconceived belief that a company’s stock price is generally sensitive to its earnings strength.
For any company, sales growth not only provides an understanding of product demand and pricing power, it is also important for growth projections and strategic decision making. If a company incurs loss in one particular quarter, then valuing it on the basis of sales growth offers an insight into its future performance.
Also, a company can enhance earnings by resorting to cost control measures while maintaining stable revenues. However, sustainable bottom-line improvement invariably requires solid top-line growth.
So, Price-to-Sales ratio turns out to be an appropriate metric for stock valuation. The importance of the metric lies in the fact that management has limited opportunities to manipulate revenue figures, unlike earnings.
Nonetheless, a large sales number does not automatically translate into profits. Therefore, it’s advisable to consider a company’s cash position, along with its sales number. Substantial cash in hand and a steady cash flow lend a company more flexibility with respect to business decisions and investments.h3 Selecting Winning Stocks/h3
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.
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