Investment in stocks made on analysis of valuation metrics is usually considered one of the best practices. 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.
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.
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 four of the six stocks that qualified the screening:
Sanofi (SNY - Free Report) manufactures and markets prescription drugs in Europe, the United States and other countries. It focuses on major therapeutic areas such as cardiovascular, immunology, oncology and diabetes, among others. Sanofi operates through three segments — Pharmaceuticals, Consumer Healthcare (CHC), and Vaccines via Sanofi Pasteur. The stock currently has a Zacks Rank #2 and a Value Score of A. It also has an estimated 3–5 year EPS growth rate of 7.3%.
Hilltop Holdings Inc. (HTH - Free Report) is a financial holding company registered under the Bank Holding Company Act of 1956. It provides consumer and business banking services through PlainsCapital Bank. It offers a wide range of financial products and services through broker-dealer (Hilltop Securities Inc. and Hilltop Securities Independent Network Inc.), mortgage origination (PrimeLending) and insurance (National Lloyds Corporation) divisions. 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.
RF Industries Ltd (RFIL - Free Report) manufactures and markets interconnect products and systems in the United States, Canada, Mexico and internationally. The company operates through two segments, RF Connector and Cable Assembly and Custom Cabling Manufacturing and Assembly. The stock currently has a Value Score of A and a Zacks Rank #2.
Tutor Perini Corporation (TPC - Free Report) is a construction company providing diversified general contracting, construction management, and design-build services to private customers and public agencies worldwide. It engages in the public works construction, replacement, and reconstruction of infrastructure like highways, bridges, tunnels, mass-transit systems; and water management and wastewater treatment facilities. It also provides services in various specialized building markets and electrical, mechanical, plumbing, fire protection systems, and pneumatically placed concrete services. The stock currently has a Zacks Rank #2 and a Value Score of A.
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