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Buy These 5 Price-to-Sales Stocks to Get Standout Returns

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Investment in stocks after the analysis of the valuation metrics is 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, the price-to-sales ratio is convenient for determining the value of stocks that are incurring losses or in an early cycle of development, generating meager or no profit.

What’s Price-to-Sales Ratio?

While a loss-making company with a negative price-to-earnings ratio falls out of investors’ 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 a 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.

ArcelorMittal (MT - Free Report) , PagSeguro Digital (PAGS - Free Report) , CNA Financial (CNA - Free Report) SK Telecom Co. (SKM - Free Report) and ePlus (PLUS - Free Report) are some companies 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.

Value Score less than or equal to B: 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.

Here are five of the 20 stocks that qualified the screening:

Luxembourg-based ArcelorMittal is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost-competitive steel plants across both the developed and developing world. It is the leader in all the main sectors – automotive, household appliances, packaging and construction. The company is expanding its steel-making capacity and remains focused on shifting to high-added value products. As part of this move, ArcelorMittal is expanding its automotive steel line of products. The company is expanding its global portfolio of automotive steels by launching a new generation of AHSS. The launch of these steels is in sync with the company’s Action 2020 program.

ArcelorMittal remains focused on executing its cost-reduction actions in the wake of the coronavirus pandemic. The company is executing a new $1-billion fixed cost reduction program, which includes actions to improve productivity and maintenance efficiency, and rationalize support functions. The MT stock currently has a Value Score of A and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

São Paulo, Brazil-based PagSeguro Digital provides financial technology solutions and services for micro-merchants and small and medium-sized businesses primarily in Brazil and internationally. The company offers multiple digital payment solutions, in-person payments via point-of-sales devices and prepaid card services.

PagSeguro Digital has been diversifying its payments business and 2022 marked the consolidation of its HUBs initiative to extend our best-in-class services to small and mid-sized clients, and PagBank consolidated as the second largest digital bank in Brazil, with 28 million clients. Its disciplined capital allocation has significantly aided operating and investing cash flow generation, positioning it to further explore the opportunities in Payments and Financial services in the Brazilian territory in the coming years. The PAGS stock currently has a Value Score of A and a Zacks Rank #1. It has an expected long-term earnings growth rate of 9%.

CNA Financial is one of the most versatile property and casualty insurers, maintaining combined ratio at favorable levels, despite a tough operating environment, which, in turn, leads to underwriting profitability. A compelling product portfolio, better retention, improving pricing, and new business growth should continue to fuel premium increases. Stable fixed-income returns and higher limited partnership returns should continue to support investment results. A strong balance sheet and cash flows enable the insurer to engage in shareholder-friendly moves like dividend hikes.

CNA Financial has been witnessing substantial improvement in the combined ratio of its property & casualty business over the past few years. A company’s combined ratio reflects its underwriting profitability. CNA Financial has been able to maintain an underlying combined ratio below 95 for 12 straight quarters. CNA currently has a Zacks Rank #2 and a Value Score of A. It has an expected long-term earnings growth rate of 5%.

SK Telecom is a wireless telecommunication service based in South Korea. The company has been leading growth of the mobile industry since 1984. SKM is focused on taking customer experience to new heights by extending beyond connectivity. The company’s Fixed and Mobile Telecommunications business maintains solid market leadership, while new growth businesses such as Media, Enterprise and AIVERSE have been achieving tangible results.

By placing artificial intelligence (AI) at the core of its business, SK Telecom is rapidly transforming into an AI company. It is focused on driving innovations in areas of telecommunications, media, AI, metaverse, cloud and connected intelligence to deliver greater value for individuals and enterprises. SKM has a Value Score of A and currently carries a Zacks Rank #2.

Herndon, VA-based ePlus is a provider of information technology (IT) solutions that enable organizations to optimize their IT environment and supply-chain processes. It operates in the United States and internationally. ePlus serves commercial entities, state and local governments, government contractors, and educational institutions.

ePlus is benefiting from the solid demand for its security, modern data center and networking solutions. The company remains focused on driving sustainable, long-term growth by continuing to expand its capabilities, investing in talent and capturing share in targeted high-growth market segments. The company currently has a Value Score of B and a Zacks Rank #2.

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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.

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