Investor's Corner: Strong Sales Growth Key Among Winners

It's a simple idea: A booming business is likely to show strong signs of life, such as sales growth.

But not just any growth qualifies. Winning stocks show strong year-over-year quarterly sales gains. Look for increases of at least 25% in the two most recent periods.

When sales linger in the single-digit range, it often indicates a lack of exciting growth opportunities.

It's especially favorable when the growth escalates. That is, sales will grow, then grow even more three months later. That's called accelerating growth, and it's a positive trend even when quarterly sales growth is falling short of 25%.

On an annual basis, sales should also be up 25% or more the three most recent fiscal years.

Ask any statistician -- numbers can lie, especially ones that include multiple factors like a typical earnings per share figure.

While a company's EPS is a great indicator of health, keep in mind that companies are able to tweak an EPS number by various means.

Sales numbers, on the other hand, are not as easily manipulated. However, they can sometimes elevate simply due to acquisitions, which could paint a deceptive picture.

Also, keep in mind other CAN SLIM fundamentals. Healthy sales growth often goes hand-in-hand with other indicators such as solid earnings growth, margins or acceleration in EPS.

Take, for example, Intercontinental Exchange (NYSE: - ).

The futures exchange set up into a cup with handle in the spring and summer of 2006 (point 1). Its 45% correction was deeper than desirable. But it formed amid a sharp market correction.

A sales sleuth would have found the ICE's sales accelerating in each quarter since its December 2005 IPO. Its first two quarters of sales growth were 45% and 58%, that's one quarter of acceleration. Then it grew again to a healthy 96% boom, marking the second period of accelerating growth.

Meanwhile shares formed a handle that corrected 13% (point 2). It also showed strength with some acceleration in earnings growth.

The stock broke out in early October (point 3). Intercontinental Exchange shares surged 114% from a buy point 15f 78.02 to a peak at 167 in late February.

Sales growth continued accelerating after the breakout, to 109% for Q3, 131% for Q4 and 152% for Q1.