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.
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.
Schneider National SNDR, Caleres Inc. CAL, AAR Corp. AIR, Signet Jewelers SIG and Avnet Inc. AVT are some stocks with a low price-to-sales ratio and the potential to offer higher returns.
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.
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 the five stocks of the 35 that qualified the screening:
Schneider National is a leading transportation and logistics services company. It offers a portfolio of premier truckload, intermodal and logistics solutions. Schneider operates one of the largest for-hire trucking fleets in North America.
Schneider’s offerings include dry van, bulk transport, intermodal and supply chain management. The stock currently has a Value Score of A and a Zacks Rank #2. SNDR has a 3–5 year EPS growth rate of 17.9%.
Caleres is a leading footwear retailer and wholesaler in the United States, China, Canada, China, and Guam. It operates through Famous Footwear and Brand Portfolio segments.
Caleres offers licensed, branded, and private-label athletic, casual, and dress footwear products to women, men, and children. CAL currently has a Zacks Rank #1 and a Value Score of B.
Wood Dale, IL-based AAR Corp. provides various products and services to the aviation and defense industries worldwide. Its principal customers include The Boeing Company and Airbus. The company now reports through two business segments – Aviation Services and Expeditionary Services – following the divestiture of Telair Cargo Group and the planned sale of Precision Systems Manufacturing.
AAR Corp. is the largest aftermarket parts supplier in the world. AIR stock 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.
Signet Jewelers is a retailer of diamond jewelry, watches as well as other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland, and the Channel Islands. Signet is often considered the leading retailer of diamond jewelry.
Signet’s Inspiring Brilliance strategy focuses on expanding big banners, boosting service revenues, broadening the Accessible Luxury and Value segments, and accelerating digital commerce. SIG currently has a Value Score of A and a Zacks Rank #1. It has a long-term earnings growth rate of 8%.
Phoenix, AZ-based Avnet is one of the world’s largest distributors of electronic components and computer products. The company’s customer base includes original equipment manufacturers, electronic manufacturing services providers, original design manufacturers, and value-added resellers.
Avnet maintains an extensive inventory, including electronic products from more than 300 component and system manufacturers, which it distributes to customers worldwide. It distributes products for companies like International Business Machines Corp. and Hewlett-Packard Co. AVT currently has a Value Score of A and a Zacks Rank #2. It has a long-term earnings growth rate of 27.7%
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