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, 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 19 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 (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 6.2% and a Value Score of A.
Metlife Inc. (MET - Free Report) is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management. The stock currently has a Zacks Rank #2 and a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 11.4%.
KB Home (KBH - Free Report) is a well-known homebuilder in the United States and one of the largest in the state. The company’s revenues are generated from its Homebuilding and Financial Services operations. It has a 3–5 year EPS growth rate of 16%. The stock currently has a Value Score of B and 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.
Quanta Services Inc. (PWR - Free Report) is a leading national provider of specialty contracting services and one of the largest contractors serving the transmission and distribution sector of the North American electric utility industry. Quanta Services has operations in the United States., Canada, Australia and other selected international markets. This Zacks Rank #2 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 8%.
Domtar Corporation (UFS - Free Report) manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and adult incontinence products. Domtar also owns and operates an extensive network of strategically located paper and printing supplies distribution facilities. The stock currently has a Zacks Rank #1 and a Value Score of B. It has a 3–5 year EPS growth rate of 5%.
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