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) , Signet Jewelers ( SIG Quick Quote SIG - Free Report) , Avnet ( AVT Quick Quote AVT - Free Report) , Vishay Intertechnology ( VSH Quick Quote VSH - Free Report) and TravelCenters of America Inc. ( TA Quick Quote TA - Free Report) are some stocks that have 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 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. The Atlanta, GA-based company’s business also includes Woodhaven Furniture Industries. Woodhaven is the manufacturer and supplier of most 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 sports a Zacks Rank #1. Signet Jewelers is a retailer of diamond jewelry, watches and 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 it sports a Zacks Rank #1. It has a long-term earnings growth rate of 8%. Phoenix, AZ-based Avnet is one of the world’s largest distributors of electronic components and computer products. The company’s customer base includes original equipment manufacturers, electronic manufacturing services providers, original design manufacturers and value-added resellers. Avnet maintains an extensive inventory, including electronic products from more than 300 component and system manufacturers, which it distributes to customers worldwide. It distributes products for companies like International Business Machines Corp. and Hewlett-Packard Co. AVT currently has a Value Score of B and sports a Zacks Rank #1. It has a long-term earnings growth rate of 37.2%. 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, 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 #2. It has a long-term earnings growth rate of 22.7%. TravelCenters of America operates travel centers and stand-alone restaurants in the United States and Canada. Its travel centers offer a range of products and services, including diesel fuel and gasoline, diesel exhaust fluid, truck repair and maintenance, and roadside services. TravelCenters of America also operates full-service and quick-service restaurants, and various customer amenities. It operates restaurants under the franchise agreement. TA currently has a Value Score of A and sports 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