Investment in stocks made after analysis of valuation metrics is usually considered one of the best practices. 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 the 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 a 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. Screening Parameters
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 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. 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. Value Score less than or equal to B: Here are seven of the 19 stocks that qualified the screening: Advance Auto Parts, Inc. ( AAP Quick Quote AAP - Free Report) operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles, light and heavy-duty trucks. It is a leading automotive parts provider in North America, serving “do-it-yourself” or “DIY”, and “do-it-for-me” or “DIFM” (or Commercial) customers. The stock currently has a Value Score of B and a Zacks Rank #1. It has a 3–5 year EPS growth rate of 10.8%. Janus Capital Group, Inc ( JHG Quick Quote JHG - Free Report) 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 #2 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 6.1%. Donegal Group, Inc. ( DGICA Quick Quote DGICA - Free Report) is an insurance holding company. It provides personal and commercial lines of property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England, and southern states. It operates through four segments: Investment Function, Personal Lines of Insurance, and Commercial Lines of Insurance. This Zacks Rank #1 company has a Value Score of A. Pampa Energia S.A. ( PAM Quick Quote PAM - Free Report) is an integrated electricity company that engages in the generation, transmission, and distribution of electricity in Argentina. It operates through Electricity Generation, Electricity Distribution, Oil and Gas, Refining and Distribution, Petrochemicals, and Holding and Other Business segments. The company generates electricity through combined cycle gas-fired generating units, thermal generation plants, open-cycle gas turbines, and hydroelectric power generation systems, as well as through a wind farm. The 3-5 year EPS growth rate for the stock is estimated at 6.5%. 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 Standard Motor Products, Inc. ( SMP Quick Quote SMP - Free Report) is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. It majorly focuses on heavy-duty industrial and the original equipment market. The stock currently has a Zacks Rank #2 and a Value Score of A. Popular Inc. ( BPOP Quick Quote BPOP - Free Report) 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. Rocky Brands ( RCKY Quick Quote RCKY - Free Report) 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 A and a Zacks Rank #1. 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