When considering valuation metrics, the obvious choice has always been Price-to-Earnings ratio as 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 that are incurring 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 could indicate the hidden strength of its business. This underrated ratio is also used to identify a recovery situation or ensure that a company's growth is not overvalued.
Price-to-Sales 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.
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 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 more suitable for investment versus a stock with a high Price-to-Sales ratio.
However, one should keep in mind that a company with high debt and low Price-to-Sales is not an ideal choice. 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, and 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 less than or equal to B: 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 seven of the 20 stocks that qualified the screening:
Rocky Brands Inc. (RCKY - Free Report) is a manufacturer and seller of footwear and apparel in the U.S., Canada and internationally. It sells products under the Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation, and Michelin brands. The stock currently has a Zacks Rank #2 and a Value Score of ‘A’.
DiamondRock Hospitality Company (DRH - Free Report) is a lodging focused real estate company, which owns premium hotels and resorts in North America. It operates hotels under the Hilton, Marriott, and Westin brand names in New York, Los Angeles, Chicago, Boston, and Atlanta; and in destination resort locations, such as the United States Virgin Islands and Colorado. It has a 3–5 year EPS growth rate of 5%. The stock currently has a Value Score of ‘B’ and a Zacks Rank #2.
Wolfsburg, Germany-based Volkswagen AG (VLKAY - Free Report) manufactures and sells automobiles in Europe, North America, South America, and the Asia Pacific. This Zacks Rank #1 company has a 3–5 years EPS growth rate of 17.3% and a Value Score of ‘A’.
Hitachi Ltd. (HTHIY - Free Report) produces, sells, and services information and telecommunication systems, power systems, social infrastructure and industrial systems, electronic systems and equipment, construction machinery, functional materials and components, automotive systems, and smart life and eco-friendly systems worldwide. It has a 3–5 year EPS growth rate of 13%. The 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.
New York-based AllianceBernstein Holding L.P. (AB - Free Report) was founded in 1987 and is a publicly owned investment manager providing research services to its clients. It currently has a Zacks Rank #2 and a Value Score of ‘A’. The stock has a 3–5 year EPS growth rate of 7.4%.
SK Telecom Co., Ltd. (SKM - Free Report) is a provider of wireless telecommunications services in South Korea. The company offers wireless voice transmission services, cellular global roaming services, and interconnection services to connect its networks to fixed-line and other wireless networks. This Zacks Rank #1 company’s 3–5 year EPS growth rate is projected to be 5.6%. The stock has a Value Score of ‘A’.
Herndon, VA-based ePlus Inc. (PLUS - Free Report) was founded in 1990 and is a provider of information technology (IT) products and services, flexible leasing and financing solutions, and enterprise supply management in the U.S. It currently has a Zacks Rank #2 and a Value Score of ‘B’.
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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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