Sales growth is an important metric for any company, as it is a vital part of growth projections and instrumental in strategic decision-making. By monitoring this key metric over multiple time periods, one can clearly understand a company’s growth trend.
Sales growth is essential to justify the fixed and variable expenses incurred to operate a business. Low revenues lead to an unprofitable business and negative financial results. Stagnant companies may generate near-term profit, but can’t rev up enough growth to attract new investors.
Moreover, in a growing economy, a lack of sales growth most likely denotes that the company is not gaining market share over its competitors. In simple terms, some sustained sales growth is necessary to support the bottom line.
Focusing solely on sales growth is not enough though. A healthy sales growth rate is certainly a positive indicator for picking good stocks, but it does not ensure profits. Therefore, taking into consideration a company’s cash position along with its sales number can prove to be a more dependable strategy.
Substantial cash on hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments. Cash also enables a company to endure market downturns. Most importantly, a sufficient cash position indicates that revenues are being channelized in the right direction.
The Winning Strategy
In order to shortlist stocks that have impressive sales growth along with a high cash balance, we added 5 Year Historical Sales Growth (%) greater than X-Industry and Cash Flow greater than $500 million as our primary screening parameters.
However, sales growth and cash strength are not the absolute criteria for selecting stocks. So, we added a few other factors to arrive at a winning strategy.
Price to Sales (P/S) Ratio less than X-Industry: This metric measures 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: Northward estimate revision has often been observed 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, which is the optimal situation for the company.
Return on equity (ROE) greater than 5%: This metric will ensure that the sales growth is getting translated into profits and the company is not sitting idle on hoards of cash. 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 7 of the 13 stocks that qualified the screening:
Laboratory Corp. of America Holdings ( (NYSE:LH) )
Newell Brands Inc. ( (NYSE:NWL) )
Hasbro Inc. ( (NASDAQ:HAS) )
WSFS Financial Corp. ( (NASDAQ:WSFS) )
LPL Financial Holdings Inc. ( (NASDAQ:LPLA) )
WEX Inc. ( (NYSE:WEX) )
Alleghany Corporation ( (NYSE:Y) )
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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: http://www.zacks.com/performance
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NEWELL BRANDS (NWL): Free Stock Analysis Report
LPL FINL HLDGS (LPLA): Free Stock Analysis Report
WSFS FINL CORP (WSFS): Free Stock Analysis Report
WEX INC (WEX): Free Stock Analysis Report
ALLEGHANY CORP (Y): Free Stock Analysis Report
LABORATORY CP (LH): Free Stock Analysis Report
HASBRO INC (HAS): Free Stock Analysis Report
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Zacks Investment Research