Investment in stocks made after an analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, the price-to-earnings ratio has always been the obvious choice. This is because calculations based on earnings are easy and come in handy. However, price-to-sales has emerged as a convenient tool to determine the value of stocks incurring losses or are in an early cycle of development, generating meager or no profits.
What’s Price-to-Sales Ratio?
While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales could indicate the hidden strength of the business. This underrated ratio is also used to identify a recovery situation or ensure that a company's growth is not overvalued.
A stock’s price-to-sales ratio reflects how much investors pay for each dollar of revenue generated by a company.
If the price-to-sales ratio is 1, investors are paying $1 for every $1 of revenues generated by the company. So, a stock with a price-to-sales below 1 is a good bargain as investors need to pay less than a dollar for a dollar’s worth.
Thus, a stock with a lower price-to-sales ratio is a more suitable investment than a stock with a high price-to-sales ratio.
The price-to-sales ratio is often preferred over price-to-earnings as companies can manipulate their earnings using various accounting measures. However, sales are harder to manipulate and are relatively reliable.
However, one should keep in mind that a company with high debt and a low price-to-sales ratio is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, a rise in market cap and ultimately a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot do the trick. One should also analyze other ratios like Price/Earnings, Price/Book, and Debt/Equity before arriving at any investment decision.
Silgan Holdings SLGN, TravelCenters of America Inc. TA, Plains All American Pipeline PAA, Vishay Intertechnology VSH and Ryder System R are some stocks that have a low price-to-sales ratio and the potential to offer higher returns.
Price to Sales less than Median Price to Sales for its Industry: The lower the price-to-sales ratio, the better.
Price to Earnings using F(1) estimate less than Median Price to Earnings for its Industry: The lower, the better.
Price to Book (common Equity) less than Median Price to Book for its Industry: This is another parameter to ensure the value feature of a stock.
Debt to Equity (Most Recent) less than Median Debt to Equity for its Industry: A company with less debt should have a stable price-to-sales ratio.
Current Price greater than or equal to $5: The stocks must be trading at a minimum of $5 or higher.
Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
Value Score less than or equal to B: Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.
Here are five of the 28 stocks that qualified the screening:
Silgan Holdings is a leading supplier of rigid packaging for consumer goods. Its products are used in diverse end markets. It is the largest metal-container supplier for food products in North America. Silgan operates 113 manufacturing facilities in North and South America, Europe, and Asia. Its product lines include steel and aluminum containers for human and pet food; custom-designed plastic containers for personal care, healthcare, pharmaceutical, household, industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products; and metal, composite and plastic closures for food and beverage products.
Silgan Holdings will benefit from the ongoing strong demand in beauty, fragrance, food and beverage markets, and its efforts to improve efficiency. The acquisitions of Gateway and Unicep are also expected to drive growth. The stock currently has a Value Score of B and a Zacks Rank #2. It has a long-term earnings growth rate of 5%.
TravelCenters of America operates travel centers and stand-alone restaurants in the United States and Canada. Its travel centers offer a range of products and services, including diesel fuel and gasoline, diesel exhaust fluid, truck repair and maintenance, and roadside services.
TravelCenters of America also operates full-service and quick-service restaurants, and various customer amenities. It operates restaurants under the franchise agreement. TA currently has a Value Score of A and sports a Zacks Rank #1.
Houston, TX-based Plains All American Pipeline L.P., a master limited partnership, is involved in the transportation, storage, terminalling and marketing of crude oil, natural gas, natural gas liquids and refined products in the United States and Canada. The partnership has operations in the Permian Basin, South Texas/Eagle Ford area, Rocky Mountain and Gulf Coast in the United States, and Manito, South Saskatchewan, and Rainbow in Canada.
The company benefits from its widespread Permian operation, cost-saving initiatives, joint ventures and asset divestitures that will support operations over the long term. The firm’s strong cash flow will help it strengthen the balance sheet. The expansion of existing pipelines and the addition of new pipeline projects in key regions are expected to drive its operations. PAA currently has a Value Score of A and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vishay is a global manufacturer and supplier of semiconductors and passive components. Its semiconductor products include metal oxide semiconductor field-effect transistors, Diodes and Optoelectronic Components. These are typically used to perform functions such as switching, amplifying, rectifying, routing or transmitting electrical signals, power conversion, and power management.
Vishay is benefiting from strong automotive and industrial end-market demand. Automotive continues to remain the key driver, owing to the growing proliferation of electronic content in vehicles and the rising adoption of driver-assistance systems across the world. Further, solid demand for IoT censoring, infrastructure programs and alternative energy is driving VSH’s performance in the industrial market. The stock currently has a Value Score of A and a Zacks Rank #2. It has a long-term earnings growth rate of 22.7%.
Florida-based Ryder System is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, food service and home furnishing.
Ryder is benefiting from improving economic and freight conditions in the United States. The stock currently has a Value Score of A and a Zacks Rank #2.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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Plains All American Pipeline, L.P. (PAA) : Free Stock Analysis Report
Silgan Holdings Inc. (SLGN) : Free Stock Analysis Report
Ryder System, Inc. (R) : Free Stock Analysis Report
TravelCenters of America LLC (TA) : Free Stock Analysis Report
Vishay Intertechnology, Inc. (VSH) : Free Stock Analysis Report
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