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 19 stocks that qualified the screening:
Janus Capital Group, Inc JHG is an asset management holding entity, providing services to institutional, retail clients, and high net worth clients. It manages separate client-focused equity and fixed income portfolios, as well as equity, fixed income and balanced mutual funds for its clients. It invests in public equity and fixed income markets, as well as real estate and private equity. This Zacks Rank #1 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 12%.
Carnival Corp. CCL operates as a cruise and vacation company. As a single economic entity, Carnival Corporation & Carnival plc form the largest cruise operator in the world. Carnival is the world’s leading leisure travel firm and carries nearly half of the global cruise guests. The company has operations in North America, Australia, Europe and Asia. 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 8.7%.
Englewood, CO-based DISH Network Corp. DISH is a holding company and operates two primary business segments — Pay-TV and Wireless. The company offers pay-TV services under the DISH brand and Sling brand. The company has invested over $11 billion to acquire certain wireless spectrum licenses and related assets since 2008. The company also has non-controlling investments in certain entities. The stock currently has a Value Score of B and a Zacks Rank #1.
PG&E Corp. PCG is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers. It engages in the business of electricity and natural gas distribution; electricity generation, procurement, and transmission; and natural gas procurement, transportation and storage. The utility also operates hydro-electric, nuclear and fossil fuel power plants. The 3-5 year EPS growth rate for the stock is estimated at 2.5%. The stock currently has a Value Score of A and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
J. Alexander's Holdings JAX owns and operates restaurants and dining primarily in the United Sates. Its four complementary upscale dining restaurant concepts are J. Alexander's, Redlands Grill, Lyndhurst Grill and Stoney River Steakhouse and Grill (Stoney River). These mainly offer American food. The stock currently has a Zacks Rank #2 and a Value Score of A.
Hilltop Holdings Inc. HTH is a financial holding company registered under the Bank Holding Company Act of 1956. It provides consumer and business banking services through PlainsCapital Bank. It offers a wide range of financial products and services through broker-dealer (Hilltop Securities Inc. and Hilltop Securities Independent Network Inc.), mortgage origination (PrimeLending) and insurance (National Lloyds Corporation) divisions. The stock currently has a Zacks Rank #1 and a Value Score of A.
Fiat Chrysler Automobiles N.V. FCAU is a designer, manufacturer and seller of vehicles and related parts, services and production systems worldwide. The group operates 102 manufacturing facilities and 46 R&D centers; and it sells through dealers and distributors in more than 135 countries. Its automotive brands include Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Ram and Maserati. The stock currently has a Value Score of A and Zacks Rank #2. The 3-5 year EPS growth rate for the stock is estimated at 2.8%.
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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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Pacific Gas & Electric Co. (PCG) : Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
DISH Network Corporation (DISH) : Free Stock Analysis Report
Carnival Corporation (CCL) : Free Stock Analysis Report
Hilltop Holdings Inc. (HTH) : Free Stock Analysis Report
Janus Capital Group, Inc (JHG) : Free Stock Analysis Report
J. Alexander's Holdings, Inc. (JAX) : Free Stock Analysis Report
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