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.
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 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, 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 21 stocks that qualified the screening:
Colfax Corporation CFX is one of the leading manufacturing and engineering companies, specializing in products and services related to air and gas handling, and fabrication technology. It caters to a diversified customer base, in the power generation, oil, gas and petrochemical, mining, marine and general industrial and other end markets across the United States, Europe, Asia, the Middle East and South America. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 14.1%. The stock has a Value Score of A.
Domtar Corporation UFS manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. Domtar also owns and operates an extensive network of strategically located paper and printing supplies distribution facilities. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 5%.
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 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 B and a Zacks Rank #2.
Capital One Financial Corporation COF is primarily focused on consumer and commercial lending as well as deposit origination. Through its banking and non-banking subsidiaries, it provides various financial products and services to consumers, small businesses and commercial clients in the United States. Capital One’s principal subsidiaries include Capital One Bank (USA), National Association (COBNA) and Capital One National Association (CONA). The company has a 3–5 year EPS growth rate of 10.9%. 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.
Escalade, Incorporated ESCA is a manufacturer and seller of sporting goods in North America, Europe, and internationally. It manufactures, imports and distributes sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. The stock currently has a Zacks Rank #2 and a Value Score of A.
Metlife Inc. MET is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management. The stock currently has a Zacks Rank #2 and a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 12.6%.
Miamisburg, OH-based Verso Corporation VRS is a producer and seller of coated papers in North America. It mainly produces papers used in commercial printing, media and marketing applications, including magazines, catalogs, books, direct mail, corporate collateral and retail inserts. It operates through two segments, Paper and Pulp. The stock currently has a Value Score of A and a Zacks Rank #1.
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Capital One Financial Corporation (COF) : Free Stock Analysis Report
MetLife, Inc. (MET) : Free Stock Analysis Report
Escalade, Incorporated (ESCA) : Free Stock Analysis Report
Colfax Corporation (CFX) : Free Stock Analysis Report
World Fuel Services Corporation (INT) : Free Stock Analysis Report
Domtar Corporation (UFS) : Free Stock Analysis Report
Verso Corporation (VRS) : Free Stock Analysis Report
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