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 17 stocks that qualified the screening:
Universal Forest Products UFPI engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products. 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 5%.
Fossil Group FOSL is a designer and manufacturer of clothing and accessories. The company's principal offerings include an extensive line of men's and women's fashion watches and jewelry (sold under proprietary and licensed brands), handbags, small leather goods, belts, sunglasses, neckwear, underwear, lounge wear, jewelry, gloves, hats, hosiery and socks. The stock currently has a Value Score of A and a Zacks Rank #2.
Vipshop Holdings Limited VIPS is an online discount retailer for various brands in the People's Republic of China. The company offers apparel for men and women, shoes for casual and formal occasions and accessories for women and men. The stock currently has a Value Score of A and a Zacks Rank #2.
Rush Enterprises RUSHA is an integrated retailer of commercial vehicles and related services in the United States. The company operates a network of commercial vehicle dealerships under the Rush Truck Centers name. The company has an estimated 3–5 year EPS growth rate of 15%. 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.
Sinopec Shanghai Petrochemical Company SHI is a manufacturer and seller of petrochemical products in the People's Republic of China. The company operates through five segments —Synthetic Fibres, Resins and Plastics, Intermediate Petrochemical Products, Petroleum Products, and Trading of Petrochemical Products. The stock currently has a Value Score of A and a Zacks Rank #1.
Popular Inc. BPOP is a diversified, publicly-owned bank holding company. It engages in providing various retail, mortgage, and commercial banking products and services, primarily to institutional and retail customers. The stock currently has a Zacks Rank #2 and a Value Score of A.
Des Moines, IA-based Principal Financial Group, Inc. PFG is an investment management company providing retirement, asset management, and insurance products and services to businesses, individuals, and institutional clients worldwide. The stock currently has a Value Score of A and a Zacks Rank #2. It has a 3–5 year EPS growth rate of 6.9%.
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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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Rush Enterprises, Inc. (RUSHA) : Free Stock Analysis Report
Vipshop Holdings Limited (VIPS) : Free Stock Analysis Report
Popular, Inc. (BPOP) : Free Stock Analysis Report
Universal Forest Products, Inc. (UFPI) : Free Stock Analysis Report
SINOPEC Shangai Petrochemical Company, Ltd. (SHI) : Free Stock Analysis Report
Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Fossil Group, Inc. (FOSL) : Free Stock Analysis Report
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