Strong sales growth is one of the most important characteristics of potential winners in the stock market. The companies that put more emphasis on sales management have a competitive advantage, as strong sales generally get converted into growth.
Revenues are often more closely monitored than earnings while assessing growth of a business. This is because investors want to make sure whether a business has the capability of generating more sales over time to cater to an expanding customer base.
Flat or declining sales growth indicates obstacles at the company and offers limited scope for sustained growth. Stagnant companies may generate near-term profit, but do not ensure enough growth to attract new investors.
Without impressive sales growth, bottom-line improvement may not be sustainable over the long term. While a company can show earnings strength by lowering expenses, a sustainable bottom line usually requires robust sales growth.
However, sales growth in isolation doesn’t indicate much about a company’s future performance. Though it provides investors an insight into product demand and pricing power, a huge sales number is not necessarily translated into profits.
Hence, taking into consideration a company’s cash position along with its sales number can prove to 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 potential investments.
Picking the Potential 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 more 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.
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 for it.
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.
Here are five of the 25 stocks that qualified the screening:
United Technologies Corporation UTX provides technology products and services to building systems and aerospace industries. This Farmington, CT-based company’s expected sales growth rate for 2019 is 15.6%, and it carries a Zacks Rank #2.
Based in Falls Church, VA, General Dynamics Corporation GD is an aerospace and defence company. Expected sales growth rate for 2019 is 6.9%, and the stock carries a Zacks Rank #2.
Ares Capital Corporation ARCC, headquartered in New York, is a business development company. Its expected sales growth rate for 2019 is 10.9%, and the stock carries a Zacks Rank #2.
Headquartered in Mayfield, OH, The Progressive Corporation PGR provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. The company’s expected sales growth rate for 2019 is 15%, and it carries a Zacks Rank #2.
DTE Energy Company DTE is engaged in the utility operations. This Detroit, MI-based company’s sales are expected to increase at the rate of 1.8% for 2019.The stock carries a Zacks Rank #2.