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 17 stocks that qualified the screening:
Sanofi SNY located in Paris, France, develops and manufactures pharmaceutical products, primarily for sale in the prescription drug market. The company, which has global operations, focuses on major therapeutic areas such as cardiovascular, immunology, oncology and diabetes, among others. It manufactures and markets prescription drugs in Europe, the United States and other countries. 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 6.9%.
EnPro Industries NPO is a manufacturer of proprietary engineered products used in critical applications. The company's principal offerings include products used in sealing technologies, metal polymer and filament wound bearings, components and service for reciprocating compressors, diesel and dual-fuel engines and other solutions that meet the needs of industries worldwide. It has manufacturing facilities in North and South America, Europe and Asia. The company has an estimated 3–5 year EPS growth rate of 14.3%. The stock currently has a Value Score of A and a Zacks Rank #2.
AZZ Inc. AZZ is a provider of galvanizing and metal coating services, welding solutions, specialty electrical equipment, and highly engineered services to the power generation, transmission, distribution, refining, and industrial markets. It offers custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting, nuclear safety-related equipment, and tubular products. The stock currently has a Value Score of B and a Zacks Rank #1.
Pampa Energia S.A. PAM is an integrated electricity company that engages in the generation, transmission, and distribution of electricity in Argentina. It operates through Electricity Generation, Electricity Distribution, Oil and Gas, Refining and Distribution, Petrochemicals, and Holding and Other Business segments. The company generates electricity through combined cycle gas-fired generating units, thermal generation plants, open-cycle gas turbines, and hydroelectric power generation systems, as well as through a wind farm. The 3-5 year EPS growth rate for the stock is estimated at 20.6%. 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.
The Greenbrier Companies GBX is a designer, manufacturer, and marketer of railroad freight car equipment in North America, Europe, and South America. It serves railroads, leasing companies, financial institutions, shippers, carriers, and transportation companies. 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 9.5%.
Summit Hotel Properties INN is a real estate investment trust focused on owning premium-branded hotels. This publicly-traded company has efficient operating models primarily in the upscale segment of the lodging industry. The stock currently has a Zacks Rank #2 and a Value Score of B.
Pasadena, CA-based Green Dot Corporation GDOT is a pro-consumer bank holding company and personal banking provider. The company offers products and services directly to customers through a large-scale omni-channel national distribution platform. It also allows third-party partners to access its banking and technology assets for offering their own financial services directly to consumers via private distribution platforms. The stock currently has a Value Score of A and a Zacks Rank #1.
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Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
Pampa Energia S.A. (PAM) : Free Stock Analysis Report
Sanofi (SNY) : Free Stock Analysis Report
AZZ Inc. (AZZ) : Free Stock Analysis Report
EnPro Industries (NPO) : Free Stock Analysis Report
Summit Hotel Properties, Inc. (INN) : Free Stock Analysis Report
Green Dot Corporation (GDOT) : Free Stock Analysis Report
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