When considering valuation metrics, price-to-earnings ratio has always been the obvious choice. This is because 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 than 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, 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 17 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 #2 company has a 3–5 year EPS growth rate of 14.1%. The stock has a Value Score of A.
MGM Growth Properties LLC (MGP - Free Report) engages in owning, acquiring, and leasing casino resort properties in the United States. These resorts provide casino gaming, hotel, convention, dining, entertainment, retail and other amenities. The stock currently has a Zacks Rank #1 and a Value Score of B. It also has an estimated 3–5 year EPS growth rate of 8.5%.
BMC Stock Holdings (BMCH - Free Report) is a lumber and building materials distributor and solutions provider in the United States. Based in Raleigh, NC, the company provides its products through a network of suppliers. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 5%.
Rocky Brands (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 Value Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Westlake Chemical Partners LP (WLKP - Free Report) operates, acquires, and develops ethylene production facilities and related assets in the United States. It also sells ethylene co-products, including propylene, crude butadiene, pyrolysis gasoline, and hydrogen directly to third parties on a spot or contract basis. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 2.8%.
JetBlue Airways (JBLU - Free Report) is a passenger carrier company that provides air transportation services. 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 7.7%.
Diamondrock Hospitality Company (DRH - Free Report) is a self-advised real estate investment trust (REIT) that has a leading portfolio of geographically diversified hotels concentrated in top gateway markets and destination resort locations. The stock currently has a Value Score of B and a Zacks Rank #2. It has a 3–5 year EPS growth rate of 3.5%.
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