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 than 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, rise in market cap and ultimately a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot 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: The stocks 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:
Colfax Corporation (CFX - Free Report) is one of the leading manufacturing and engineering companies, specializing in products and services related to air and gas handling, and fabrication technology. It caters to a diversified customer base, in the power generation, oil, gas and petrochemical, mining, marine and general industrial and other end markets, across the United States, Europe, Asia, the Middle East and South America. This Zacks Rank #1 company has a 3–5 year EPS growth rate of 12.8%. The stock has a Value Score of B.
Capital One Financial Corporation (COF - Free Report) is primarily focused on consumer and commercial lending as well as deposit origination. Through its banking and non-banking subsidiaries, it provides various financial products and services to consumers, small businesses and commercial clients in U.S. Capital One’s principal subsidiaries include Capital One Bank (USA), National Association (COBNA) and Capital One National Association (CONA). This Zacks Rank #2 company has a 3–5 year EPS growth rate of 10.7% and a Value Score of A.
Convergys Corporation is a global leader in relationship management. It provides customer management services to communications and media, technology, financial services, retail, healthcare, government, travel and hospitality, and other vertical markets worldwide. The company’s unique combination of domain expertise, operational excellence, and innovative technologies has delivered process improvement and actionable business insight to clients. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 7.5%.
Avnet (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 9.5%. 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.
Hub Group (HUBG - Free Report) is a transportation management company that provides multi-modal solutions throughout North America, including intermodal, truck brokerage, dedicated and logistics services. The company is one of the largest over-the-road brokers in North America. This Zacks Rank #1 company has a Value Score of A.
J. Alexander's Holdings (JAX - Free Report) owns and operates restaurants and dining primarily in the United Sates. Its four complementary upscale dining restaurant concepts are J. Alexander's, Redlands Grill, Lyndhurst Grill, and Stoney River Steakhouse and Grill (Stoney River). These mainly offer American food. The stock currently has a Zacks Rank #2 and a Value Score of A.
Miamisburg, OH-based Verso Corporation (VRS - Free Report) is a producer and seller of coated papers in North America. It mainly produces papers used in commercial printing, media and marketing applications, including magazines, catalogs, books, direct mail, corporate collateral and retail inserts. It operates through two segments, Paper and Pulp. The stock currently has a Value Score of A and a Zacks Rank #1.
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