Investment in stocks made after analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, 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 that are 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 are paying for each dollar of revenues generated by a company.
If the price-to-sales ratio is 1, it means that investors are paying $1 for every $1 of revenues generated by the company. So, it goes without saying that 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.
Price-to-sales 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 low price-to-sales is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, 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 seven of the 14 stocks that qualified the screening:
GAIN Capital Holdings, Inc. GCAP is a provider of trading services and solutions to the over-the-counter (OTC) and exchange-traded markets worldwide. It operates in two segments, Retail and Futures. It provides access to a range of financial products, including spot foreign exchange (forex) and precious metals trading; spread bets; and OTC options on forex, as well as contracts for differences on currencies, commodities, indices, individual equities, cryptocurrencies, bonds, options, and interest rate products. The stock currently has a Zacks Rank #2 and a Value Score of B.
Donegal Group, Inc. DGICA is an insurance holding company. It provides personal and commercial lines of property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England, and southern states. It operates through four segments: Investment Function, Personal Lines of Insurance, and Commercial Lines of Insurance. This Zacks Rank #2 company has a Value Score of A.
Diamond S Shipping Inc. DSSI is a shipping company involved in seaborne transportation of crude oil, refined petroleum, and other production. It operates through two segments, Crude Tankers and Product Tankers. The stock currently has a Value Score of A and a Zacks Rank #2.
Millersburg, PA-based Mid Penn Bancorp, Inc. MPB is a bank holding company for Mid Penn Bank that provides commercial banking services to individuals, partnerships, non-profit organizations, and corporations. The company offers various time and demand deposit products, including checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit, and IRAs. The 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.
Tutor Perini Corporation TPC is a construction company, providing diversified general contracting, construction management and design-build services to private customers and public agencies worldwide. The company operates through three segments: Civil, Building, and Specialty Contractors. The stock currently has a Value Score of B and a Zacks Rank #1.
DCP Midstream Partners, LP DCP owns and operates a portfolio of midstream energy assets in the United States. It owns and operates approximately 44 natural gas processing plants and 51,000 miles of natural gas gathering and transmission systems. It serves petrochemical and refining companies, and retail propane distributors. The stock currently has a Zacks Rank #2 and a Value Score of A.
Houston, TX-based Oasis Midstream Partners LP OMP provides crude oil, natural gas, and water-related midstream services in North America. It offers natural gas gathering, compression, processing, and gas lift services; and crude oil gathering, stabilization, blending, and storage services. Further, it engages in produced and flowback water gathering and disposal services; freshwater supply and distribution services; and crude oil transportation services from the Wild Basin operating area to Johnson's Corner. The stock currently has a Zacks Rank #1 and a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Tutor Perini Corporation (TPC) : Free Stock Analysis Report
GAIN Capital Holdings, Inc. (GCAP) : Free Stock Analysis Report
Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
DCP Midstream Partners, LP (DCP) : Free Stock Analysis Report
Oasis Midstream Partners LP (OMP) : Free Stock Analysis Report
Mid Penn Bancorp (MPB) : Free Stock Analysis Report
Diamond S Shipping Inc. (DSSI) : Free Stock Analysis Report
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