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:
Quanta Services Inc. PWR is a leading national provider of specialty contracting services and one of the largest contractors serving the transmission and distribution sector of the North American electric utility industry. Quanta Services has operations in the United States, Canada, Australia and other selected international markets. This Zacks Rank #1 company has a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated to be 8%.
Vitamin Shoppe Inc. VSI is an omni-channel specialty retailer and contract manufacturer of nutritional products in the United States and internationally. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition products, and other health and wellness products of approximately 900 brands, including own and national brands. This Zacks Rank #1 company has a Value Score of B.
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 B. It has a 3-5 year estimated EPS growth rate of 5%.
Tutor Perini Corporation TPC is a construction company. It operates worldwide and offers diversified general contracting, construction management, and design-build services to private customers and public agencies. The company has an estimated 3–5 year EPS growth rate of 10%. 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.
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 #2.
J. Alexander's Holdings JAX owns and operates restaurants and dining primarily in the United Sates. Its four complementary upscale dining restaurant concepts are J. Alexander's, Redlands Grill, Lyndhurst Grill, and Stoney River Steakhouse and Grill (Stoney River). These mainly offer American food. The stock currently has a Zacks Rank #1 and a Value Score of B.
Magna International Inc. MGA is a leading manufacturer and supplier of automotive components. Based in Aurora, Canada, the company is a designer and manufacturer of automotive systems, assemblies, modules and components, apart from engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers (OEMs) of cars and light trucks. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 6% 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.
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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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Korea Electric Power Corporation (KEP) : Free Stock Analysis Report
Magna International Inc. (MGA) : Free Stock Analysis Report
Tutor Perini Corporation (TPC) : Free Stock Analysis Report
Quanta Services, Inc. (PWR) : Free Stock Analysis Report
Vitamin Shoppe, Inc (VSI) : Free Stock Analysis Report
Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report
J. Alexander's Holdings, Inc. (JAX) : Free Stock Analysis Report
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