WWhen it comes to choosing stocks, investors often opt for complex investment strategies to generate higher returns. But with constantly changing market dynamics, it may not deliver the desired results every time. So, it always makes sense to use conventional strategies based on key fundamentals when choosing stocks.
One of these strategies is sales growth. Maintaining steady growth in sales is the key to the survival of any business. Sales growth remains a vital metric for any business as it is important for growth projections and strategic decision making.
Therefore, when companies experience losses for a temporary period, they are measured against their income, as the growth (or decline) in turnover is usually an indicator of a company’s future performance. Plus, unlike price-to-earnings and price-to-book ratios, which can turn negative and cease to be relevant, the price-to-sales (P / S) ratio is available even for companies that have experienced choppy waves.
In addition, earnings and book value are mainly influenced by several factors. However, management has limited opportunities to manipulate sales, which further underscores the importance of the P / S ratio. Therefore, the P / S ratio can serve as a more reliable measure for the valuation of stocks.
Just focusing on sales growth is not enough, however. Taking into account a company’s cash position as well as its sales can be a more reliable strategy. Plentiful liquidity and stable cash flow give a company more flexibility when it comes to business decisions and investments.
Choose the winning actions
In order to shortlist stocks with impressive sales growth and high cash balance, we selected Historical sales growth over 5 years (%) higher than that of X-Industry and Cash flow of over $ 500 million as our main screening parameters.
But sales growth and cash flow strength are not the absolute criteria for stock picking. Therefore, we added some other factors to come up with a winning strategy.
P / S ratio lower than X-Industry: This metric determines the value attributed to each dollar of a company’s revenue. The lower the ratio, the better it is to choose a stock since the investor pays less for each unit of sale.
% change in revisions to F1 sales estimates (four weeks) greater than X-Industry: Revisions to estimates, better than those of the industry, are often seen as a trigger for a rise in stock prices.
Operating margin (average of the last five years) greater than 5%: The operating margin measures how much every dollar of a company’s turnover translates into profits. A high ratio indicates that the company has good cost control and that sales are growing faster than costs – an optimal situation.
Return on equity (ROE) greater than 5%: This will ensure that sales growth translates into profits and that the business does not accumulate cash. A high ROE means the business is spending wisely and is likely profitable.
Rank of Zacks less than or equal to 2: Zacks Rank # 1 (Strong Buy) or 2 (Buy) stocks are known to outperform regardless of the market environment. You can see The full list of today’s Zacks # 1 Rank stocks here.
Here are five of the 27 actions that qualified the screening:
Based in Minneapolis, MN Target company TGT has grown from a simple brick and mortar retailer to an omnichannel entity. TGT has invested in technology, improving websites and mobile apps, and modernizing the supply chain to keep pace with the changing retail landscape and better compete with pure e-commerce players.
Target’s expected sales growth rate for fiscal 2022 is 14.3%. The stock currently carries a Zacks Rank # 2.
Based in Clayton, MO, Olin Company OLN is a vertically integrated global producer and distributor of chemicals and a US munitions manufacturer. Internationally, OLN operates in regions such as Latin America, Asia-Pacific and Europe.
Olin’s sales growth rate for 2021 is 53.5%. He currently sports a Zacks Rank # 1.
Based in Houston, Texas, Callon Oil Company CPE focuses on the exploration and production of oil and gas resources in the Permian Basin. Among the three major Permian sub-basins – Midland Basin, Delaware Basin and Central Basin Platform – CPE has a strong footprint in the Midland and Delaware basins.
Sales of Callon Petroleum are expected to increase 72.5% for 2021. The stock is currently ranked number one at Zacks.
Based in Chicago, Illinois, Cboe Global Markets, Inc. CBOE is one of the largest stock exchange operators in the United States by volume and one of the world’s leading markets for ETP trading. Cboe’s trading platforms include the largest options exchange in the United States and the largest traded value exchange in Europe.
Cboe’s sales growth rate for 2021 is 15.6%. The stock currently carries a Zacks Rank # 2.
Saskatoon, Canada Nutrien Ltd. NTR is one of the leading integrated providers of agricultural inputs and services. NTR produces three nutrients for crops: potash, nitrogen and phosphate.
Nutrien’s forecast sales growth rate for 2021 is 26.7%. The stock currently sports a rank of Zacks # 1.
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Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies can be found at: https://www.zacks.com/performance
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