Among a host of valuation metrics that are at disposal, Price-to-Sales has emerged as a convenient tool to determine the value of stocks that are suffering losses or are in an early cycle of development, generating meager or no profits.
Though a loss-making company with a negative Price-to-Earnings ratio falls out of investors’ favor, its Price-to-Sales ratio 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.
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. 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.
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 17 stocks that qualified the screening:
Standard Motor Products Inc. (SMP - Free Report) is one of the leading manufacturers, distributors and marketers of automotive replacement parts in the U.S. The stock, with a Zacks Rank #1 and a Value score of ‘A’, currently has a projected 3–5 year EPS growth rate of 15%.
Comfort Systems USA Inc. (FIX - Free Report) is a national provider of comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services in the U.S. The stock currently has a Zacks Rank #2 and a Value score of ‘A’. Also, the 3–5 year EPS growth rate for the stock is estimated at 10%.
ePlus inc. (PLUS - Free Report) provides information technology products and services, flexible leasing and financing solutions, and enterprise supply management in the United States. The company has a Value score of ‘A’ and a projected 3–5 year EPS growth rate of 5%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
CVR Refining, LP (CVRR - Free Report) is an independent petroleum refiner and marketer of transportation fuels in the United States. The stock currently has a Zacks Rank #2 and a Value score of ‘A.’ The company’s projected 3–5 year EPS growth rate is 12.4%.
Celestica Inc. (CLS - Free Report) is a supply chain solutions’ provider in the communications, consumer, aerospace and defense, industrial, healthcare, energy, semiconductor equipment, servers, and storage end markets in the Americas, Asia, and Europe. The stock 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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