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 14 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.
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 B and a Zacks Rank #2.
Hibbett Sports HIBB is a major athletic-inspired retailer with presence in small and mid-sized markets across the country. The company operates predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. It provides high-quality assortment, including footwear, apparel, accessories and athletic equipment at competitive prices in convenient locations. The 3-5 year EPS growth rate for the stock is estimated at 10.9%. 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.
China Petroleum & Chemical Corporation SNP or Sinopec, with its head office in Beijing, China, is one of the largest petroleum and petrochemical companies in Asia. It is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. The company is also the largest producer and distributor of petrochemicals in the nation. The stock currently has a Value Score of A and a Zacks Rank #2. The 3-5 year EPS growth rate for the stock is estimated at 2.8%.
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 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%.
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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China Petroleum & Chemical Corporation (SNP) : Free Stock Analysis Report
Popular, Inc. (BPOP) : Free Stock Analysis Report
Universal Forest Products, Inc. (UFPI) : Free Stock Analysis Report
Principal Financial Group, Inc. (PFG) : Free Stock Analysis Report
Fossil Group, Inc. (FOSL) : Free Stock Analysis Report
Hibbett Sports, Inc. (HIBB) : Free Stock Analysis Report
Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report
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