Investment in stocks made after an analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, the 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 incurring losses or are in an early cycle of development, generating meager or no profits.
What’s Price-to-Sales Ratio?
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 pay for each dollar of revenue generated by a company. If the price-to-sales ratio is 1, investors are paying $1 for every $1 of revenues generated by the company. So, 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. Sonoco Products Co. ( SON Quick Quote SON - Free Report) , Signet Jewelers ( SIG Quick Quote SIG - Free Report) , The Mosaic Company ( MOS Quick Quote MOS - Free Report) , Ryder System ( R Quick Quote R - Free Report) and Cognizant Technology Solutions ( CTSH Quick Quote CTSH - Free Report) are some stocks with a low price-to-sales ratio and the potential to offer higher returns. The price-to-sales ratio 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 a low price-to-sales ratio is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, a 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 the five of the 30 stocks that qualified the screening: Sonoco is a leading provider of consumer packaging, industrial products, protective packaging and packaging supply chain services. The company manufactures paperboard, primarily from recycled materials, for both internal use and open market sale. Sonoco operates through two segments: Consumer Packaging and Industrial Paper Packaging. Due to its geographic footprint and the cost-competitive nature of its businesses, the company is constantly seeking the most cost-effective means and structure to serve its customers and respond to fundamental changes in its markets. The stock currently has a Value Score of B and a Zacks Rank #2. It has a long-term earnings growth rate of 5%. Signet Jewelers is a retailer of diamond jewelry, watches as well as other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland, and the Channel Islands. Signet is often considered the leading retailer of diamond jewelry. Signet’s Inspiring Brilliance strategy focuses on expanding big banners, boosting service revenues, broadening the Accessible Luxury and Value segments, and accelerating digital commerce. SIG currently has a Value Score of A and a Zacks Rank #1. It has a long-term earnings growth rate of 8%. Mosaic is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It was formed through the combination of the fertilizer businesses of agribusiness giant Cargill Incorporated and IMC Global Inc. Mosaic is the biggest integrated phosphate producer globally and is also among the four largest potash producers in the world. MOS caters to customers across 40 countries. It accounts for roughly 13% of the global annual phosphate production and around 11% of global annual potash production. The company currently has a Zacks Rank #1 and a Value Score of B. Mosaic has a 3–5 year EPS growth rate of 7%. You can see . the complete list of today’s Zacks #1 Rank stocks here Florida-based Ryder System is recognized as one of the world's largest providers of integrated logistics and transportation solutions. Ryder’s customers range from small businesses to large international enterprises. They are drawn from a wide variety of industries, the most significant of which include automotive, electronics, transportation, grocery, lumber and wood products, foodservice and home furnishing. Ryder is benefiting from improving economic and freight conditions in the United States. The stock currently has a Value Score of A and a Zacks Rank #1. Cognizant is a leading professional services company. It offers digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services. The Teaneck, NJ-headquartered company is focusing its investments on four key areas of digital: IoT, AI, experience-driven software engineering and cloud. CTSH currently has a Value Score of B and a Zacks Rank #2. It has a long-term earnings growth rate of 12%. 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