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number cruncher

What are we looking for?

S&P 500 companies with growing sales in an increasingly tough environment.

The screen

The tough economic environment across the world has certainly made it more difficult for most businesses to maintain revenue lines. As a top-line measure of performance, sales is the lifeblood of a company’s continued ability to operate. Today, I use Morningstar CPMS to look for companies in the S&P 500 Index that have shown that they have grown sales by ranking the stocks on:

  • Three-year and five-year sales growth rates (how much, on average, sales have grown each year in the past three and five years, respectively);
  • Quarterly sales momentum (a comparison of the latest four quarters of revenue with the same figure one quarter ago, higher figures preferred);
  • Trailing return on equity;
  • Five-year beta (a safety factor – recall that beta measures a stock’s sensitivity to an index. A stock with a beta of one has historically moved in lockstep with the market, while a stock with a beta less than one would have moved less than the market. Today we prefer companies that have low betas).

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

I used Morningstar CPMS to back-test this strategy from December, 1996, through December, 2020, using a maximum of 15 stocks with no more than three per economic sector. Once a month, stocks were sold if they fell below the top 25 per cent of the S&P 500 universe based on the above factors, or if any of those factors individually turned negative. Over this time frame, the strategy produced a total return of 11.9 per cent while the S&P 500 Total Return index gained 9 per cent.

It was also found that over the 96 calendar quarters tested, the index showed negative returns in 27 of these quarters. Of these negative quarters, the strategy outperformed the index 81.5 per cent of the time (22 of 27 quarters). The stocks that meet the requirements to be purchased into the model today are listed in the accompanying table.

This article does not constitute financial advice. It is always recommended to speak with a registered investment adviser or professional before investing.

Select S&P 500 stocks growing their top line 

RankCompanyTickerMorningstar SectorMkt. Cap. (US$ Mil.)5Y Sales Growth Rate (%)3Y Sales Growth Rate (%)Qtly. Sales Mom. (%)Trailling ROE (%)5Y BetaDiv. Yld. (%)12M Ttl. Rtn. (%)*Recent Close (US$)
1Domino's PizzaDPZ-NCons. Cyclical15,188.722.417.85.2110,769.00.40.837.9385.50
2Vertex Pharma.VRTX-QHealth care59,647.541.637.510.636.90.60.01.0229.38
3Citrix SystemsCTXS-QTechnology16,392.72.810.82.8253.80.21.111.0133.14
4Netflix Inc.NFLX-QCommun. Svcs.218,357.233.827.55.130.60.80.043.2494.25
5AbbVie Inc.ABBV-NHealth care193,813.712.811.26.6288.00.84.739.9109.78
6DexCom Inc.DXCM-QHealth care34,586.340.439.33.928.70.80.049.6360.17
7Progressive Corp.PGR-NFinancial Svcs.55,644.517.217.83.527.20.50.418.395.07
8Pool Corp.POOL-QCons. Cyclical15,461.110.310.47.067.20.80.676.6385.00
9Adobe Inc.ADBE-QTechnology226,259.525.922.43.642.21.00.034.3471.65
10Dollar General DG-NCons. Defensive53,503.312.813.84.836.20.50.743.3218.38
11MSCI Inc.MSCI-NFinancial Svcs.37,567.215.913.52.272,145.00.90.759.6453.19
12Cboe Global Mkts.CBOE-AFinancial Svcs.10,914.435.47.74.517.40.71.7-16.8101.02
13AutoZone Inc.AZO-NCons. Cyclical29,180.610.512.23.2780,351.10.90.021.21,282.15
14Oracle Corp.ORCL-NTechnology183,766.68.511.52.5108.80.81.520.862.42
15Hershey Co.HSY-NCons. Defensive22,038.03.02.81.370.50.32.2-1.7149.38

Source: Morningstar CPMS; data as of Jan. 12.

Note: DPZ, MSCI and AZO all show very high values for return on equity owing to the low or negative book value of equity. These extreme values were accounted for in the ranking process. *Total return is from month end, 12 months ago.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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