When considering valuation metrics, price-to-earnings ratio has always been the obvious choice as 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 its 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 the 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 all 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 23 stocks that qualified the screening:
PCM Inc. PCMI is a technology solutions provider to businesses, government and educational institutions and individual consumers in the United States and the rest of Europe. It offers technology products and solutions as well as consumer electronics equipment and other consumer products. This Zacks Rank #1 company has a 3–5 year EPS growth rate of 20%. The stock has a Value Score of B.
United Natural Foods UNFI is the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. The company offers more than 1,00,000 high-quality natural, organic and specialty products, consisting of national, regional and private label brands in six product categories. The stock currently has a Zacks Rank #2 and a Value Score of A. Also, the 3-5 year EPS growth rate for the stock is 8%.
Convergys Corporation CVG is a global leader in relationship management. It provides customer management services to communications and media, technology, financial services, retail, healthcare, government, travel and hospitality, and other vertical markets worldwide. The company’s unique combination of domain expertise, operational excellence, and innovative technologies has delivered process improvement and actionable business insight to clients. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 7.5%.
Luxembourg-based ArcelorMittal MT is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both developed and developing worlds. The company has a Value Score of A and a 3–5 year EPS growth rate of 4.8%. It also carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Miami, FL-based World Fuel Services Corporation INT is a global energy management company. It provides supply fulfillment, energy procurement advisory services, and transaction and payment management solutions to commercial and industrial customers, principally in the aviation, marine and land transportation industries. It has a 3–5 year EPS growth rate of 5%. The stock currently has a Value Score of A and a Zacks Rank #2.
Rocky Brands Inc. RCKY is a manufacturer and seller of footwear and apparel in the United States, Canada and internationally. It sells products under the Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and Michelin brands. The stock currently has a Zacks Rank #1 and a Value Score of B.
Triple-S Management Corporation GTS is an independent licensee of the Blue Cross Blue Shield Association. It is the largest managed care company in Puerto Rico, serving approximately one million members across all regions. Triple-S offers a broad portfolio of managed care and related products in the commercial, Medicare and Medicaid markets. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 10% and a Value Score of A.
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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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United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report
Triple-S Management Corporation (GTS) : Free Stock Analysis Report
PCM, Inc. (PCMI) : Free Stock Analysis Report
World Fuel Services Corporation (INT) : Free Stock Analysis Report
Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report
ArcelorMittal (MT) : Free Stock Analysis Report
Convergys Corporation (CVG) : Free Stock Analysis Report
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