Extreme market volatility, mainly due to implications of coronavirus on the global economy, is making individual investors undertake complex investment strategies with an aim of generating high returns. However, this may not yield the desired results in the current situation.
Hence, using conventional strategies — based on key fundamentals — to find stocks is always a wise decision. Such strategies are not only safe and sound, but are also worthwhile in bearish markets. One such strategy is to look for stocks with sustainable sales growth.
Maintaining steady sales growth is the key to survival for any business, particularly amid the current market scenario. Sales growth remains an important measure for any company, as it is important for making projections and strategic decisions.
It’s worth keeping in mind that when companies incur a loss for a temporary period, they are valued on their revenues, as sales growth (or decline) is usually an indicator of a company’s future earnings performance. While price to earnings and price to book value ratios can turn negative and cease to be relevant, the price-to-sales (P/S) ratio is available even for firms that have hit choppy waters.
Focusing solely on sales growth is, however, not enough. Considering a company’s cash position and sales can prove to be a more dependable strategy. Substantial cash in hand and steady cash flow give a company more flexibility with respect to business decisions and investments.
Choosing Winning Stocks
In order to shortlist stocks with 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.
However, 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 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 19 stocks that qualified the screening:
American Equity Investment Life Holding Company AEL provides life insurance products and services. This West Des Moines, IA-based company’s sales are expected to increase 2.3% in 2020. The stock sports a Zacks Rank #1.
Based in Chicago, IL, TransUnion TRU provides risk and information solutions. Expected sales growth rate for 2020 is 8.1%. The stock carries a Zacks Rank #2.
Kalamazoo, MI-based Stryker Corporation SYK is one of the world’s largest medical device companies operating in the global orthopedic market. The company’s expected sales growth rate for 2020 is 7.2% and it carries a Zacks Rank #2.
Leidos Holdings, Inc. LDOS — based in Reston, VA — provides services and solutions in defense, intelligence, civil, and health markets. Its expected sales growth rate for 2020 is 16.6%. The stock carries a Zacks Rank #2.
SS&C Technologies Holdings, Inc. SSNC, headquartered in Miramar, FL, provides software products and software-enabled services. Its expected sales growth rate for 2020 is 2.6% and the stock carries a Zacks Rank #2.
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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: https://www.zacks.com/performance