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 versus a stock with a high price-to-sales ratio.
Though Price-to-Earnings is the first thing to cross one’s mind while using valuation metrics, 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.
A loss-making company with a negative price-to-earnings ratio generally falls out of investor favor. However, 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.
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 and 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 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 17 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.
Based in Columbus, OH, Big Lots BIG is a broad-line closeout retailer in the United States. The company offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, and Electronics & Accessories. 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 12%.
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%.
Hitachi HTHIY produces sells, and services information and telecommunication systems, power systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, functional materials and components, automotive systems, and smart life and eco-friendly systems worldwide. It has a 3–5 year EPS growth rate of 13%. The stock 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.
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.
GMS Inc. GMS is a distributor of wallboards, suspended ceilings systems, and related construction products in the United States and Canada. The company's products consist of wallboard, suspended ceilings systems or ceilings and complementary interior construction products in commercial and residential buildings. The company has a Value Score of A and a Zacks Rank #2. It has a 3–5 year EPS growth rate of 7%.
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.
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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
GMS Inc. (GMS) : Free Stock Analysis Report
Hitachi Ltd. (HTHIY) : 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
Big Lots, Inc. (BIG) : Free Stock Analysis Report
Convergys Corporation (CVG) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research