Since the beginning of 2022, the markets have been paying the price for macroeconomic and geopolitical ambiguity. Amid these serious concerns, investors are reluctant to enter the market. However, a conventional stock picking strategy would be useful in these times to generate robust returns.
One such method is to pick stocks with steady sales growth. In this regard, actions like PepsiCo Inc. (DYNAMISM – free report), UFP Industries, Inc. (UFPI – free report), Carlisle Companies Incorporated (CSL – free report), Broadridge Financial Solutions, Inc. (BR – free report) and Silgan Holdings Inc. (SLGN – Free Report) are worth checking out.
When valuing a business, revenues are often more scrutinized than profits. This is because investors want to ensure that a business has the ability to generate more sales over time to cater to an expanding customer base. Stable or declining sales growth indicates obstacles within the business. Stagnant businesses may generate short-term profits but do not provide sufficient growth to attract new investors.
Without solid revenue growth, improved earnings may not be sustainable over the long term. While a company can demonstrate earnings strength by cutting costs, continuously improving its bottom line typically requires robust sales growth.
Therefore, the price-to-sales (P/S) ratio may prove to be an appropriate measure for stock valuation. This remains a key stock selection criterion bearing in mind that management generally has limited opportunities to tamper with earnings as they can with earnings. Thus, the P/S ratio is less subject to manipulation than the price/earnings ratio.
Yet sales growth alone says little about a company’s future performance. Thus, taking into account a company’s cash position as well as its turnover may prove to be a more reliable investment strategy. Substantial liquidity and a stable cash flow give a business more flexibility when it comes to business decisions and potential investments.
Selection of potential winning stocks
To shortlist stocks with impressive sales growth and a high cash balance, we selected Historical 5-year sales growth (%) greater than X-Industry and Cash flow over $500 million as our main screening parameters.
But sales growth and cash strength are not the absolute criteria for stock picking. Therefore, we added other factors to arrive at a winning strategy.
P/S ratio lower than X-Industry: This measure determines the value assigned 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 sold.
% Revision of F1 Sales Estimate Revisions (Four Weeks) Above X-Industry: Better-than-industry estimate revisions are often seen as triggering a rise in the stock price.
Operating margin (average of the last five years) above 5%: Operating margin measures how well every dollar of a company’s sales translates into profit. 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 measure will ensure that sales growth translates into profits and that the company does not accumulate 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, regardless of the market environment. You can see the full list of today’s Zacks #1 Rank stocks here.
Here are five of the 18 actions that qualified the screening:
Based in Purchase, NY, PepsiCo is one of the world’s leading food and beverage companies. PEP’s complementary brands/companies include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods.
PepsiCo’s forecasted sales growth rate for 2022 is 5.6%. The stock currently carries a No. 2 Zacks rank.
Based in Grand Rapids, MI, UFP Industries is a holding company with its subsidiaries in North America, Europe, Asia and Australia. UFPI supplies wood, wood composites and other products to the retail, industrial and construction market.
UFP Industries sales are expected to grow 11.4% for 2022. The stock currently ranks Zacks #1.
Based in Scottsdale, AZ, Carlisle is a diversified global portfolio of niche brands and companies offering high-tech, high-margin products. CSL is engaged in the design, manufacture and sale of a wide range of roofing and waterproofing products, engineered products and finishing equipment.
Carlisle’s projected sales growth for 2022 is 39.4%. The company, at present, sports a #1 Zacks rank.
Broadridge Financial, based in Lake Success, NY, is a global fintech company that provides investor communications and technology-driven solutions. BR is a leading producer and distributor of a variety of documents, widely used in the financial industry, including powers of attorney, annual reports, prospectuses and trade confirmations.
Broadridge Financial’s forecasted sales growth rate for fiscal year 2023 is 7.5%. The stock carries a No. 2 Zacks rank at present.
Based in Stamford, Connecticut, Silgan Holdings is a leading supplier of rigid packaging for consumer goods. SLGN is the largest supplier of metal food containers in North America.
Silgan Holdings’ forecasted sales growth rate for 2022 is 12.8%. The stock currently carries a No. 2 Zacks rank.
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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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance