A stock’s price-to-sales ratio reflects how much investors are paying for each dollar of revenues generated by a 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.
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.
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 23 stocks that qualified the screening:
Macy's, Inc. (M - Free Report) , through its retail stores and Internet websites (macys.com and bloomingdales.com), trades in a wide range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods in 43 states, the District of Columbia, Guam and Puerto Rico. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5 year EPS growth rate of 7.5%.
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 #1 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 12%.
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 #1.
PG&E Corp. (PCG - Free Report) is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers. It engages in the business of electricity and natural gas distribution, electricity generation, procurement, and transmission, and natural gas procurement, transportation and storage. The utility also operates hydro-electric, nuclear and fossil fuel power plants. The 3-5 year EPS growth rate for the stock is estimated at 2.5%. 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.
First Horizon National Corporation (FHN - Free Report) is a financial services company based in Memphis, TN. It is the holding company for First Tennessee Bank and FTN Financial. First Tennessee Bank offers deposit products, loans, investments, insurance, financial planning, trusts, asset management and cash management services in Tennessee. FTN Financial provides capital markets and investment banking services. 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 8.1%.
Zaandam, the Netherlands-based Koninklijke Ahold Delhaize N.V. (ADRNY - Free Report) was founded in 1887 and operates retail food stores primarily in the United States and Europe. The company offers supermarket, superstore, online shopping, online grocery shopping, small supermarket, convenience store, drugstore, wine and liquor store, online shopping for general merchandise, compact hyper and supermarket, and hypermarkets store formats. This Zacks Rank #2 company’s 3–5 year EPS growth rate is expected to be 4.7%. The stock has a Value Score of A.
THL Credit, Inc. (TCRD - Free Report) is a business development company specializing in direct and fund-of-fund investments. The fund seeks to invest in debt and equity securities of middle market companies that require capital for growth and acquisitions. Such investments may include PIPES, acquisition, market or product expansion, recapitalization, debt securities, warrants, preferred stock, high-yield bonds, private equity investments and securities of public companies that are broadly traded and others. The stock currently has a Zacks Rank #2 and a Value Score of B.
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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.
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