When considering valuation metrics, price-to-earnings ratio has always been the obvious choice 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.
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.
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 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 versus a stock with a high price-to-sales ratio.
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.
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 16 stocks that qualified the screening:
United Natural Foods, Inc. (UNFI - Free Report) is the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. The company offers more than 1,00,000 high-quality natural, organic and specialty products, consisting of national, regional and private label brands in six product categories. The stock currently has a Zacks Rank #1 and a Value Score of A. Also, the 3-5 year EPS growth rate for the stock is estimated at 8.2%.
Universal Forest Products Inc. (UFPI - Free Report) engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products. The stock currently has a Zacks Rank #2 and a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated at 5%.
Rocky Brands Inc. (RCKY - Free Report) is a manufacturer and seller of footwear and apparel in the United States, 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 #1 and a Value Score of A.
Luxembourg-based ArcelorMittal (MT - Free Report) 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 worlds. The company has a 3-5 years EPS growth rate of 13.4% and a Value Score of A. The stock currently has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
People's Republic of China-based Daqo New Energy Corp. (DQ - Free Report) manufactures and sells polysilicon and wafers in the People's Republic of China. This Zacks Rank #1 company has a 3-5 years EPS growth rate of 7% and a Value Score of A.
Cabot Corporation (CBT - Free Report) is a specialty chemicals and performance materials company that offers carbon black and rubber blacks. It also provides compounds of carbon black and rubber primarily for tire applications; and cesium formate, a drilling and completion fluid for use in high pressure and high temperature oil and gas well construction. This Zacks Rank #2 company has a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated at 10%.
Nippon Telegraph And Telephone Corporation (NTTYY - Free Report) is a provider of fixed and mobile voice related services, IP/packet communications services, telecommunication equipment, system integration, and other telecommunications-related services in Japan and internationally. It has a Zacks Rank #2 and a Value Score of A. Also, the 3-5 year EPS growth rate for the company is estimated at 7.8%.
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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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