Back to top

Investment Ideas

Many investors look towards various key ratios as a way to determine the value of a company. The most common one is the price-to-earnings, or P/E, ratio. Value investors use the P/E ratio to determine if a stock is cheap. The lower the ratio the cheaper the company.

However, the P/E ratio has its flaws. It is easier to manipulate earnings than other aspects of a company's performance. That's why I like to also use the price-to-sales, or P/S, ratio when I'm looking for top stocks.

What Is The P/S Ratio?

The P/S ratio uses the market capitalization of a company and divides it by the past 12 months' revenues. A low price-to-sales ratio is preferred as that means an investor is paying less for each sale.

It is more difficult for a company to tweak sales performance, than it is to influence earnings, since it's pretty straightforward. Therefore, the P/S ratio can be a better indicator of hidden value than the P/E ratio.

What Ratio Do You Want To See?

Just like with the P/E ratio, the lower the P/S ratio is, the better.

When seeking out attractive fundamentals, you want to look for companies with P/S ratios under 1.0 as that usually indicates value. But it can also be helpful to compare a company's P/S ratio with those in its industry. Again, you want it to be lower than those in its industry as that indicates that it is paying less than its competitors for its sales.

Don't Only Use the P/S Ratio

The P/S ratio is not perfect. It shouldn't be the only fundamental you're screening for.

It doesn't take debt into account so a company can have a low P/S ratio but mounds of debt and therefore might not be a good investment. It also doesn't account for expenses, which can affect profit.

But if you combine the P/S ratio with other indicators, such as the P/E ratio, and then put the Zacks Rank on top of that, it can be a powerful combination for finding attractive stocks.

I did just that and found the following three companies, all of which are cheap value stocks as well as Zacks #1 Rank (Strong Buys).

3 Stocks With Dream P/S Ratios

  1. Phillips 66
  2. Trinity Industries
  3. HanesBrands

1. Phillips 66 (PSX - Analyst Report) Phillips 66 has a well known name but the company is "new" having been spun off from ConocoPhillips in early 2012. Phillips 66 is one of the largest independent refiners in the U.S. with 15 refineries and 15,000 miles of pipelines.

The favorable crack spread is currently holding at around the $20/Bbl level. The industry refinery utilization rate has also stabilized. The company is generating big cash flow and recently raised its quarterly dividend by 25%. It currently yields 2.2%. It's really cheap.

P/S ratio = 0.1
Forward P/E = 6.5
Zacks #1 Rank (Strong Buy)

2. Trinity Industries, Inc. (TRN - Snapshot Report)

Trinity Industries is one of the largest railcar manufacturers in North America. It also makes inland barges, highway guardrail and crash cushions and its energy division makes structural wind tower and tank containers. Railcars are seeing strong demand. As of June 30, 2012, the company had a $3.2 billion railcar backlog.

P/S ratio = 0.7
Forward P/E = 10.1
Zacks #1 Rank (Strong Buy)

3. HanesBrands (HBI - Analyst Report)

HanesBrands makes basic apparel and lingerie under several well known name brands such as Hanes, Champion, Playtex, Bali, Wonderbra and Gear for Sports.

On Oct 3, it reaffirmed full year guidance based on consumer and retail trends through mid- to late September, including the Back to School selling period.

P/S ratio = 0.7
Forward P/E = 12.7
Zacks #1 Rank (Strong Buy)

Want More of Our Best Recommendations?

Zacks' Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Then each week he hand-selects the most compelling trades and serves them up to you in a new program called Zacks Confidential.

Learn More>>

Tracey Ryniec is the Value Stock Strategist for She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her on twitter at @TraceyRyniec.

Please login to or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research


Are you a new Zacks Member or a visitor to

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
TRIQUINT SE… TQNT 20.67 +6.52%
RF MICRO DE… RFMD 12.44 +5.74%
VASCO DATA… VDSI 14.79 +4.82%
STRATTEC SE… STRT 81.23 +4.27%
PATTERSON-U… PTEN 34.45 +2.71%