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.
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 16 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 14.5%. The stock has a Value Score of A.
MGM Growth Properties LLC MGP engages in owning, acquiring, and leasing casino resort properties in the United States. The resorts provide casino gaming, hotel, convention, dining, entertainment, retail and other amenities. The stock currently has a Zacks Rank #2 and a Value Score of B. It also has an estimated 3–5 year EPS growth rate of 6.2%.
Korea Electric Power Corporation KEP is an integrated electric utility company that generates, transmits and distributes electricity in Korea and internationally. Based in Naju, South Korea, the company generates power from nuclear, coal, oil, liquefied natural gas, internal combustion, combined-cycle, integrated gasification combined cycle, hydro, wind, solar, fuel cell, biogas, and other sources. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5 year EPS growth rate of 5%.
Israel Chemicals Ltd. ICL is a specialty minerals company with worldwide operations. The company's products include bromine specialty chemicals, potash, phosphate fertilizers, and specialty performance and industrial products. It markets its products primarily in Israel, Europe, and the Americas. The company has an estimated 3–5 year EPS growth rate of 9.5%. The stock currently has a Value Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
People's Republic of China-based Daqo New Energy Corp. DQ manufactures and sells polysilicon and wafers in the People's Republic of China. This Zacks Rank #2 company has a 3-5 year EPS growth rate of 29% and a Value Score of A.
Ready Capital Corp RC is a real estate company that acquires, originates, manages, services, and finances small balance commercial (SBC) loans, small business administration (SBA) loans, residential mortgage loans, and mortgage backed securities collateralized primarily by SBC loans, or other real estate-related investments. The stock currently has a Zacks Rank #1 and a Value Score of A.
China Eastern Airlines Corporation Ltd. CEA is involved in the civil aviation industry in the People's Republic of China and internationally. It offers passenger, cargo, mail delivery, ground, cargo handling, tour operations, air catering and other extended transportation services. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5 year EPS growth rate of 5.3%.
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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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China Eastern Airlines Corporation Ltd. (CEA) : Free Stock Analysis Report
Korea Electric Power Corporation (KEP) : Free Stock Analysis Report
DAQO New Energy Corp. (DQ) : Free Stock Analysis Report
Israel Chemicals Shs (ICL) : Free Stock Analysis Report
Colfax Corporation (CFX) : Free Stock Analysis Report
MGM Growth Properties LLC (MGP) : Free Stock Analysis Report
Ready Capital Corp (RC) : Free Stock Analysis Report
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