Concerns, including the persistent disruptions in the global supply chain system, record-high inflation and the aggressive monetary policy globally, continue to weigh on investor sentiments. These have led to an increase in recession risks in the next six to nine months.
Amid such headwinds and market volatility, investors are wary about entering the market. Hence, a conventional stock-picking strategy is the need of the hour, which will help generate robust returns. One such method is choosing stocks with steady sales growth. In this regard, stocks like Crocs, Inc. CROX, Unum Group UNM, QuidelOrtho Corporation QDEL, LPL Financial Holdings Inc. LPLA and Clean Harbors, Inc. CLH are worth considering.
While evaluating any company, revenues are often more analyzed than earnings. This is because investors want to make sure that a business has the capability of generating more sales over time to cater to an expanding customer base. Stable or declining sales growth indicates obstacles at the company. Stagnant companies may generate near-term profit but do not ensure enough growth to attract new investors.
Without solid revenue growth, bottom-line improvement may not be sustainable. While a company can show earnings strength by lowering costs, continuous bottom-line improvement usually requires robust sales growth.
Nonetheless, sales growth alone doesn’t indicate much about a company’s prospects. So, taking into account a company’s cash position along with its sales number can prove to be a sensible investment strategy. Substantial cash in hand and a steady cash flow give a company more flexibility with respect to business decisions and potential investments.
Selecting the Potential Winning Stocks
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 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.
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 18 stocks that qualified the screening:
Crocs, based in Broomfield, CO, is one of the leading footwear brands with a focus on comfort and style. CROX offers a wide variety of footwear products, including sandals, wedges, flips and slides that cater to people of all ages.
Crocs’ expected sales growth rate for 2022 is 51.5%. The stock carries a Zacks Rank #2 at present.
Chattanooga, TN-headquartered Unum provides financial protection benefit solutions. UNM operates through four segments: Unum U.S., Closed Block, Colonial Life and Unum International.
Unum’s expected sales growth rate for 2022 is 1%. The stock currently carries a Zacks Rank #2.
San Diego, CA-based QuidelOrtho is a key player in the provision of in-vitro diagnostics technologies designed for point-of-care settings, clinical labs and transfusion medicine. QDEL sells its products directly to end users and distributors for professional use.
QuidelOrtho’s sales are expected to surge 130.4% for 2022. The stock carries a Zacks Rank #2 at present.
LPL Financial, based in Boston, MA, is a clearing broker-dealer and an investment advisory firm. LPLA acts as an agent for its advisors, on behalf of their clients, by providing access to a broad array of financial products and services.
LPL Financial’s expected sales growth for 2022 is 11.4%. The company, at present, sports a Zacks Rank #1.
Headquartered in Norwell, MA, Clean Harbors is a leading provider of environmental, energy and industrial services in North America. CLH operates the largest number of hazardous waste incinerators, landfills and treatment, storage and disposal facilities.
Clean Harbors’ expected sales growth rate for 2022 is 35%. The stock carries a Zacks Rank #2 currently.
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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
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