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.
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.
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.
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 its business. This underrated ratio is also used to identify a recovery situation or ensure that a company's growth is not overvalued.
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 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 seven of the 25 stocks that qualified the screening:
Del Frisco's Restaurant Group, Inc. (DFRG - Free Report) develops, owns, and operates restaurants in the United States, under the Del Frisco's Double Eagle Steak House, Sullivan's Steakhouse, and Del Frisco's Grille brand names. The stock has a Zacks Rank #2 and a Value Score of B. The 3–5 year EPS growth rate for the stock is estimated at 11%.
Zaandam, the Netherlands-based Koninklijke Ahold Delhaize N.V. (ADRNY - Free Report) was founded in 1887 and operates retail food stores primarily in the United States and Europe. The company offers supermarket, superstore, online shopping, online grocery shopping, small supermarket, convenience store, drugstore, wine and liquor store, online shopping for general merchandise, compact hyper and supermarket, and hypermarkets store formats. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 11.4%. The stock has a Value Score of A.
Citizens Financial Group Inc. (CFG - Free Report) is a bank holding company for Citizens Bank, N.A. and Citizens Bank of Pennsylvania that provides retail and commercial banking products and services in the United States. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 21.1%. The stock has a Value Score of B.
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 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.
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 #2 company has a 3–5 years EPS growth rate of 12.9% and a Value Score of A.
Xcerra Corporation (XCRA - Free Report) is a provider of test and handling capital equipment, interface products, and test fixtures and related services to the semiconductor and electronics manufacturing industries worldwide. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 12%. The stock has a Value Score of B.
The Greenbrier Companies, Inc. (GBX - Free Report) is a manufacturer and seller of railroad freight car equipment in North America and Europe. This Zacks Rank #1 company’s 3–5 year EPS growth rate is 9.5%. The stock has 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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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