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.
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.
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 21 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%.
Wolfsburg, Germany-based Volkswagen AG 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 9.1% and a Value Score of A.
Escalade, Incorporated is a manufacturer and seller of sporting goods in North America, Europe, and internationally. It manufactures, imports and distributes sporting goods brands in basketball goals, archery, indoor and outdoor game recreation, and fitness products. The stock currently has a Zacks Rank #1 and a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated at 15%.
Avnet, Inc. (AVT - Free Report) is one of the world’s largest distributors of electronic components and computer products. It has a 3–5 year EPS growth rate of 9%. The stock currently has a Value Score of A and a Zacks Rank #2. 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.
FTD Companies, Inc. is a floral and gifting company with operations primarily in the United States, Canada, the United Kingdom, and the Republic of Ireland. It provides floral arrangements and plants, gifts, and related products and services to consumers, retail florists, and other retail locations and companies. This Zacks Rank #2 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 15%.
ManpowerGroup Inc. (MAN - Free Report) is the global leader in the employment services industry and has a well-established network of 2,900 offices in 80 countries. The company offers its services to approximately 400,000 clients, including small and medium-sized enterprises across all industry sectors as well as the world's largest multinational corporations. The stock currently has a Zacks Rank #2 and a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »