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. 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. The Aaron's Company Inc. ( AAN Quick Quote AAN - Free Report) , MarineMax ( HZO Quick Quote HZO - Free Report) , Marathon Oil ( MRO Quick Quote MRO - Free Report) , Vishay Intertechnology ( VSH Quick Quote VSH - Free Report) and Huntsman Corporation ( HUN Quick Quote HUN - Free Report) are some stocks with a low price-to-sales ratio and the potential to offer higher returns. 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 37 stocks that qualified the screening: Aaron's is a major omnichannel provider of lease-to-own (“LTO”) and purchase solutions, mainly to underserved and credit-challenged customers. Through its various business segments, the company primarily deals in sales and lease ownership, apart from specialty retailing of furniture, home appliances, electronics, computers, and various other products and accessories. This Atlanta, GA-based company’s business also includes Woodhaven Furniture Industries ("Woodhaven"). Woodhaven is the manufacturer and supplier of most of the bedding and a large portion of the upholstered furniture leased and sold at Aaron's company-operated and franchised stores. The stock currently has a Value Score of A and a Zacks Rank #1. MarineMax is a recreational boat and yacht retailer in the United States. The company sells new and used recreational boats, including pleasure boats, boats, and sport cruisers; mega-yachts, sport yachts, and other yachts; fishing boats; motor and convertible yachts; pontoon boats; fishing boats; ski boats; and jet boats. MarineMax also provides marine parts and accessories, boat covers, trailer parts, water sport accessories, high-performance accessories and a line of boating accessories. HZO currently has a Zacks Rank #1 and a Value Score of A. Houston, Texas-based Marathon is a leading oil and natural gas exploration and production (‘E&P’) company with operations in the United States and Africa. As of the end of 2021, Marathon Oil had approximately 1,106 million oil-equivalent barrels in net proved reserves (52% crude oil/condensate and 68% proved developed), and 89% were located in the United States. Marathon’s oil and gas operations are mainly concentrated in the United States (primarily Oklahoma, Eagle Ford, Bakken and Northern Delaware) and Equatorial Guinea. The company’s robust operational metrics suggest strong long-term cash flows that should support further price appreciation. The company currently has a Zacks Rank #2 and a Value Score of B. Marathon has a 3–5 year EPS growth rate of 14.4%. You can see . the complete list of today’s Zacks #1 Rank stocks here Vishay is a global manufacturer and supplier of semiconductors and passive components. Its semiconductor products include metal oxide semiconductor field-effect transistors (MOSFETs), Diodes and Optoelectronic Components. These are typically used to perform functions such as switching, amplifying, rectifying, routing or transmitting electrical signals, power conversion, and power management. Vishay is benefiting from strong automotive and industrial end-market demand. Automotive continues to remain the key driver owing to the growing proliferation of electronic content in vehicles and the rising adoption of driver-assistance systems across the world. Further, solid demand for IoT censoring, infrastructure programs and alternative energy is driving VSH’s performance in the industrial market. The stock currently has a Value Score of A and a Zacks Rank #1. Huntsman Corporation is among the world's largest manufacturers of differentiated and commodity chemical products. The company markets its products to a diverse group of industrial and consumer customers. Its products include MDI, polyols, propylene oxide, amines, surfactants, maleic anhydride, epoxy-based polymer formulations, textile chemicals and dyes. Huntsman’s products are used in a number of applications including aerospace, automotive, construction products, adhesives, personal care and hygiene, durable and nondurable consumer products, digital inks, electronics, medical, packaging, coatings and construction, power generation, refining and textile chemicals. HUN currently has a Value Score of B 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. 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