When considering valuation metrics, price-to-earnings ratio has always been the obvious choice as 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 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 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 23 stocks that qualified the screening:
The Finish Line Inc. FINL is a leading retailer of athletic shoes, apparel, and accessories for men, women, and kids in the United States. The company offers athletic shoes, as well as an assortment of apparel and accessories of popular sporting goods brands. This Zacks Rank #2 company has a 3-5 year EPS growth rate of 10.4%. The stock has a Value Score of B.
Luxembourg-based ArcelorMittal MT is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing worlds. This Zacks Rank #1 company has a 3-5 years EPS growth rate of 13.4% and a Value Score of A.
Universal Forest Products Inc. 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 B. The 3-5 year EPS growth rate for the stock is estimated at 5%.
Hitachi Ltd. HTHIY produces sells, and services information and telecommunication systems, power systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, functional materials and components, automotive systems, and smart life and eco-friendly systems worldwide. It has a 3-5 year EPS growth rate of 13%. The stock 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.
Wolfsburg, Germany-based Volkswagen AG VLKAY manufactures and sells automobiles in Europe, North America, South America, and the Asia Pacific. This Zacks Rank #2 company has a 3-5 years EPS growth rate of 18.7% and 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 #1 company has a Value Score of A.
Nippon Telegraph And Telephone Corporation NTTYY is a provider of fixed and mobile voice related services, IP/packet communications services, telecommunication equipment, system integration, and other telecommunications-related services in Japan and internationally. The stock has a Zacks Rank #2 and a Value Score of A. Also, the 3-5 year EPS growth rate for the stock is estimated at 7.8%.
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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.
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Volkswagen AG (VLKAY) : Free Stock Analysis Report
Universal Forest Products, Inc. (UFPI) : Free Stock Analysis Report
Hitachi Ltd. (HTHIY) : Free Stock Analysis Report
The Finish Line, Inc. (FINL) : Free Stock Analysis Report
ArcelorMittal (MT) : Free Stock Analysis Report
SK Telecom Co., Ltd. (SKM) : Free Stock Analysis Report
Nippon Telegraph and Telephone Corporation (NTTYY) : Free Stock Analysis Report
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