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 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.
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 22 stocks that qualified the screening:
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%.
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%.
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). This Zacks Rank #2 company has a 3–5 year EPS growth rate of 10.9% and a Value Score of A.
Rocky Brands 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 Value Score of A and a Zacks Rank #1. 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.
Zaandam, the Netherlands-based Koninklijke Ahold Delhaize N.V. ADRNY was founded in 1887 and operates retail food stores primarily in the United States and Europe. The company offers supermarket, superstore, online shopping, online grocery shopping, small supermarket, convenience store, drugstore, wine and liquor store, online shopping for general merchandise, compact hyper and supermarket, and hypermarkets store formats. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 9.4%. The stock has a Value Score of A.
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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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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Capital One Financial Corporation (COF) : Free Stock Analysis Report
MetLife, Inc. (MET) : Free Stock Analysis Report
Escalade, Incorporated (ESCA) : Free Stock Analysis Report
Domtar Corporation (UFS) : Free Stock Analysis Report
Verso Corporation (VRS) : Free Stock Analysis Report
Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report
Ahold NV (ADRNY) : Free Stock Analysis Report
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