Rules of the Game: To Rake in the Sales

 | Dec 10, 2012 | 3:00 PM EST
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When you hear the phrase "fundamental indicators," what generally comes to mind is earnings, or some variation thereof. Bottom-line growth, price-to-earnings ratios, dividends -- and all the attendant ways of analyzing dividend payouts -- are the metrics typically under the microscope.

But, while I certainly scrutinize earnings-related data, I often prefer to put my focus on revenue. As we all know, companies can use perfectly legal and ethical accounting methods to massage their earnings, and firms also report various charges and items that can cut into profit -- even in a quarter with robust sales growth. So when a stock catches your eye, it's always prudent to analyze the revenue situation before you make a purchase.

Generally I use earnings growth, price appreciation or moving-average support as my early indicators of a stock's potential. I then eyeball the sales growth to check for steady rates of increases. I also look for acceleration or deceleration -- the former, of course, being preferable.

Occasionally, however, I run a scan specifically built for increasing revenue. I filter out poor earnings performance and beaten-down stocks that are out of favor with investors. I end up with a list of stocks that have revenue-driven earnings growth, and price performance that is generally outpacing the benchmark index.

As you'd expect, the top revenue growers tend to hail from the ranks of smaller, newer companies. Later this week, I'll write about some small-caps with excellent revenue performance -- but, for today's column, I sorted my scan by market capitalization in order to analyze some of the larger names. These can often be more stable portfolio components. In other words, large-caps and some mid-caps have better liquidity, and may not flail around so much at the whims of the market.

At the top of the heap is a familiar big-cap name: Google (GOOG). Revenue here has risen at rates of 24% or more in the past eight quarters, and growth rates have accelerated in the past two quarters, from 24% to 35% to 45%.

Analysts see Google's top line coming in at $12.4 billion in the current quarter, which would be a whopping 52% from the year-earlier quarter.

On a technical level, the stock is rebounding from 200-day support, a bullish development. However, the shares have been hitting resistance at the 50-day line. Google is one of those companies that is almost constantly in the news, and day-to-day business developments tend to move the stock less than earnings reports.

Over the weekend, for example, news broke that Google is teaming up with Apple (AAPL) to bid on a number of Kodak's imaging patents.

In terms of market cap, the next-best revenue grower on my screen was a mid-cap stock I've been following since it went public a year ago: Michael Kors (KORS). Here, the sales growth rate has been 50% or higher in the past eight quarters. Remember, the company is newly public -- exactly the point at which firms tend to sport these kinds of growth levels. 

For the current quarter, Wall Street has pegged Michael Kors' revenue growth at 45.4%, to $543.34 million.

The stock trades in a somewhat erratic fashion, and has a beta of 1.47. It comes in just under the $10 billion market-cap threshold for a large-cap, sporting a current capitalization of $9.97 billion. It has good liquidity, moving more than 3 million shares per day.

Also, this is another example of a stock that is perched above its 200-day line and below its 50-day. At this juncture, waiting for Michael Kors to cross above its 50-day line may be a good idea.

Later this week, I'll provide some revenue and chart analysis on some more mid- and small-cap names. 

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