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Using the P/S Ratio to Find Cheap Stocks

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  • (1:00) - Finding Value Stocks With Great Sales
  • (6:45) - Tracey’s Top Stock Picks
  • (14:20) - Episode Roundup: MTH, GPK, OMI, SGC, WHR


Welcome to Episode #201 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

We’re in August, the dog days of summer. Earnings season is quickly winding down.

The S&P 500 is near all-time highs again, but with earnings on the decline that means it is trading with an average forward P/E of 26. That’s really expensive.

Where can you find cheap stocks right now?

Instead of looking at the earnings, investors should look at sales.

What’s a Value P/S Ratio?

Value investors can use the price-to-sales ratio to find cheap stocks. If you screen for a P/S ratio under 1.0, that means that you are paying less for the sales.

For example, a P/S ratio of 0.5, means you are paying 50 cents for each dollar of sales. That’s a deal, right?

Screening Using the P/S Ratio

Just running a screen using a P/S ratio under 1.0 would be too broad but if you add the Zacks Ranks of #1 (Strong Buy) and #2 (Buy), you then should get a narrower screen.

However, this screen still returned 241 companies. That’s far too many.

Adding some other classic value fundamentals like the P/B ratio and PEG ratio finally brings the screen down to a workable 19 companies.

5 Companies with Cheap P/S Ratios

1.       Meritage Homes (MTH - Free Report) was the only homebuilder that made the screen even though many of them are cheap right now. It has a P/S ratio of just 0.95 even thought shares have soared 62% year-to-date.

2.       Graphic Packaging (GPK - Free Report) is a paper-based consumer packaging company for the food, beverage and foodservice industry. It never suspended its dividend, which currently yields 2%. It’s dirt cheap with a P/S ratio of 0.7.

3.       Owens & Minor (OMI - Free Report) makes medical protective equipment, or PPP, and during the pandemic this has been one of the hottest products. Shares are up 209% year-to-date but they still have a P/S ratio of just 0.1.

4.       Superior Group of Companies (SGC - Free Report) is a small cap company that makes uniforms, does custom business branding and operates The Office Gurus. In the second quarter, net sales were up 73%. Not only is this 100-year old company paying its dividend, it announced a special dividend. It’s still a value, with a price-to-sales ratio of 0.7.

5.       Whirlpool Corp. (WHR - Free Report) saw a significant recovery across all its markets in June. This appliance maker is still paying a dividend, which is currently yielding 2.7%. How cheap is it? It’s trading with a P/S ratio of just 0.6.

What else do you need to know about the P/S ratio and value stocks?

Tune into this week’s episode to find out.

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