Though Price-to-Earnings is the first thing to cross one’s mind while using valuation metrics, 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 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 more suitable for investment versus 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 and a rise in market cap and ultimately a higher Price-to-Sales ratio.
In any case, the Price-to-Sales ratio used in isolation can’t 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: They 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 26 stocks that qualified the screening:
The Greenbrier Companies, Inc. GBX is a manufacturer and seller of railroad freight car equipment in North America and Europe. This Zacks Rank #1 company’s 3–5 year EPS growth rate is 9.5%. The stock has a Value Score of A.
Hartsville, SC-based Sonoco Products Company SON was founded in 1899 and produces and sells industrial and consumer packaging products in North and South America, Europe, Australia, and Asia. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 4.7%. The stock has a Value Score of B.
United Natural Foods, Inc. UNFI is the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. The company offers more than 1,00,000 high-quality natural, organic and specialty products, consisting of national, regional and private label brands in six product categories. The stock currently has a Zacks Rank #2 and a Value Score of B. The 3–5 year EPS growth rate for the stock is estimated at 5.8%.
Avnet, Inc. AVT is one of the world’s largest distributors of electronic components and computer products. It has a 3–5 year EPS growth rate of 9.1%. 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.
Citizens Financial Group Inc. CFG is a bank holding company for Citizens Bank, N.A. and Citizens Bank of Pennsylvania that provides retail and commercial banking products and services in the United States. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 15.1%. The stock has a Value Score of B.
Xcerra Corporation XCRA is a provider of test and handling capital equipment, interface products, and test fixtures and related services to the semiconductor and electronics manufacturing industries worldwide. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 16%. The stock has a Value Score of A.
SK Telecom Co., Ltd. SKM is a provider of wireless telecommunications services in South Korea. The company offers wireless voice transmission services, cellular global roaming services, and interconnection services to connect its networks to fixed-line and other wireless networks. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 7.7%. The stock has 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.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
Sonoco Products Company (SON) : Free Stock Analysis Report
Avnet, Inc. (AVT) : Free Stock Analysis Report
Citizens Financial Group, Inc. (CFG) : Free Stock Analysis Report
United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report
SK Telecom Co., Ltd. (SKM) : Free Stock Analysis Report
Xcerra Corporation (XCRA) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research