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:
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%.
Triple-S Management Corporation GTS is an independent licensee of the Blue Cross Blue Shield Association. It is the largest managed care company in Puerto Rico, serving approximately one million members across all regions. Triple-S offers a broad portfolio of managed care and related products in the commercial, Medicare and Medicaid markets. This Zacks Rank #2 company has a 3–5 year estimated EPS growth rate of 10% and a Value Score of A.
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%.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zaandam, the Netherlands-based Koninklijke Ahold Delhaize N.V. ADRNY was founded in 1887 and operates retail food stores primarily in the United States and Europe. The company offers supermarket, superstore, online shopping, online grocery shopping, small supermarket, convenience store, drugstore, wine and liquor store, online shopping for general merchandise, compact hyper and supermarket, and hypermarkets store formats. This Zacks Rank #2 company’s 3–5 year EPS growth rate is expected to be 7.1%. The stock has a Value Score of A.
Shoe Carnival Inc. SCVL is a family footwear retailer in the United States. It sells dress, casual, and athletic footwear products for men, women, and children, as well as accessories, including socks, belts, shoe care items, handbags, sport bags, backpacks, jewelry, scarves, and wallets. The stock has a Zacks Rank #2 and a Value Score of A.
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 B.
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.
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
Korea Electric Power Corporation (KEP) : Free Stock Analysis Report
Popular, Inc. (BPOP) : Free Stock Analysis Report
Quanta Services, Inc. (PWR) : Free Stock Analysis Report
Triple-S Management Corporation (GTS) : Free Stock Analysis Report
Shoe Carnival, Inc. (SCVL) : Free Stock Analysis Report
Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report
Ahold NV (ADRNY) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research