Ariston Select: Sales Growth Leaders
(Formerly Reuters Select)
Whatever our individual investment philosophies, we all know that ultimately, stock prices are tied to company bottom line performances. And the most fundamental way for a company to generate a healthy bottom line is to flourish on the top line.
Rationale for this screen
Everybody likes to invest in companies whose EPS are growing quickly. But in seeking growth, investors sometimes get so caught up in looking at EPS trends that they don't always dig deeper to see where the strong profits are coming from.
Essentially, there are two ways to generate earnings growth. A company can boost sales. Or, a company can do things that lead to wider margins.
Margins are certainly important, and our Operating Margin screen addresses this theme in great detail. But this isn't necessarily the best way to generate growth over the long term. Companies can cut costs for a while. But they can't do it forever.
Sooner or later, even the best managed companies run out of opportunities to improve margins. Hence long-term growth will depend on a company's ability to generate more sales.
Specific screen criteria
Here's how the screen was created:
We start with the comparison examined most frequently by investors: the year-to-year comparison in the latest quarter. We look at the latest quarter and require that the Sales change be greater than zero, and that each company's sales growth be greater than its industry average. We then extend the industry comparison to the Trailing Twelve Month (TTM) interval.
Usually, sales growth is based on healthy demand for the company's goods or services and/or sufficient market power to raise prices. But sometimes, the top line can get a boost from factors that are less impressive, such as acquisitions. Therefore, we seek some indication that a company's sales prowess amounts to something more than a one-shot boost. We require that sales growth be above the industry average over the latest three years.
Having already narrowed the database down quite a bit using basic sales-related tests, we go the final distance by shifting to other indicators consistent with investment merit. We require a showing that at least some of the top-line strength translate to EPS, through a test requiring that company EPS growth exceed the industry average in the TTM period, the last three years or the last five years. We also require that the consensus estimate for the current fiscal quarter be higher than where it was thirteen weeks ago. Finally, we add a test requiring that recent insider stock purchase transactions (net of sales) be greater than zero.
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