Among a host of valuation metrics that are at disposal, the Price-to-Sales ratio helps to determine the value of stocks that are suffering losses or are in the early cycle of development, generating some or no profits. Though 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 in its business.
This underrated ratio is also used to identify recovery situations or ensure that a company's growth is not overvalued.
While the Price-to-Earnings ratio is the first to cross one’s mind while using valuation metrics, Price-to-Sales has emerged as a useful way of narrowing down the list of stocks.
Price-to-Sales can be preferred over Price-to-Earnings, as companies and managements can fiddle with earnings figure using various accounting measures. However, sales are harder to manipulate and are relatively reliable.
A stock’s Price-to-Sales ratio reflects how much investors are paying for each dollar of revenues generated by the 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 ratio below 1 is a good bargain, as investors need to pay less than a dollar for a dollar’s worth.
Also, a stock with a low Price-to-Sales ratio is a more suitable investment choice than one with a high ratio.
However, one should keep in mind that a company with high debt and a low Price-to-Sales ratio is not an ideal investment pick. The high debt level will have to be paid off at some point, leading to further share issuance and a rise in market cap and ultimately a higher Price-to-Sales ratio.
In any case, the Price-to-Sales ratio used in isolation can’t do the trick. One should also analyze other ratios like Price/Earnings, Price/Book, Debt/Equity before arriving at any investment decision.
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: They must all 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 Style Score equal to A: Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.
Here are five of the seven stocks that qualified the screening:
Headquartered in Aurora, Canada, Magna International Inc. (MGA - Free Report) is a producer and seller of automotive products. The company, with a Zacks Rank #2 and a Value score of ‘A’, currently has a projected 3–5 year EPS growth rate of 11.7%.
Omega Protein Corporation based in Houston, TX, is a nutritional product company and a leading integrated provider of specialty oils and specialty protein products. This Zacks Rank #2 company has a 3–5 years EPS growth rate of 8% and a Value score of ‘A.’
Nippon Telegraph and Telephone Corporation provides a variety of telecommunications services, including telephone, telegraph, leased circuits, data communication, terminal equipment sales and other services. The company has a Value score of ‘A’ and a projected 3–5 year EPS growth rate of 9.5%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Korea Electric Power Corp. (KEP - Free Report) , also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #2 company’s 3–5 year EPS growth rate is pegged at 25%. The stock has a Value score of ‘A’.
Steelcase Inc. (SCS - Free Report) is a producer and seller of an integrated portfolio of furniture settings, user-centered technologies, and interior architectural products. The company currently has a Zacks Rank #2 and a Value score of ‘A.’
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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