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. 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.
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 14 stocks that qualified the screening:
Janus Capital Group, Inc (JHG - Free Report) is an asset management holding entity, providing services to institutional, retail clients, and high net worth clients. It manages separate client-focused equity and fixed income portfolios, as well as equity, fixed income, and balanced mutual funds for its clients. It invests in public equity and fixed income markets, as well as real estate and private equity. This Zacks Rank #2 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 7.4%.
Arkema S.A. (ARKAY - Free Report) is a manufacturer and seller of specialty chemicals and advanced materials worldwide. The company has a strategic partnership with Carbon Inc. to deliver materials for manufacturing partners. The stock currently has a Zacks Rank #2 and a Value Score of A.
Pembroke, Bermuda-based Watford Holdings Ltd. (WTRE - Free Report) operates as a property, casualty, and mortgage insurance and reinsurance company worldwide. The stock currently has a Value Score of A and a Zacks Rank #2.
Arcosa, Inc. (ACA - Free Report) is engaged in manufacturing and selling of infrastructure-related products and services for the construction, energy, and transportation markets. Through its operating segments, it serves concrete producers; commercial, residential, industrial, and highway contractors; manufacturers of masonry products; state and local governments; and equipment rental dealers. The 3-5 year EPS growth rate for the stock is estimated at 12.6%. 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.
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.
MDU Resources Group, Inc. (MDU - Free Report) is a utility natural gas distribution company. It provides value-added natural resource products and related services that are essential for energy transportation, regulated energy delivery and construction materials and services business. The company operates through regulated energy delivery platform and construction materials and services platform. 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 7.1%.
Herndon, VA-based ePlus inc. (PLUS - Free Report) provides information technology solutions to enable organizations optimize their information technology environment and supply chain processes in the United States. The stock currently has a Value Score of A and Zacks Rank #1.
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.