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.
Screening Parameters
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 18 stocks that qualified the screening:
Computer Task Group, Incorporated CTG is an information technology solutions and staffing services provider in North America, Europe and India. The company offers IT solution services like implementation and optimization of packaged software applications, development and deployment of customized software and solutions designed to fit the needs of a specific client or market, design and distribution of complex technology components, and consulting 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 15%.
Quanta Services Inc. PWR is a leading national provider of specialty contracting services and one of the largest contractors serving the transmission and distribution sector of the North American electric utility industry. Quanta Services has operations in the United States, Canada, Australia and other select international markets. This Zacks Rank #1 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 14.5%.
Universal Forest Products UFPI — soon to be known as UFP Industries, Inc. — is a holding company with its subsidiaries throughout North America, Europe, Asia, and Australia. The company supplies wood, wood composite and other products in retail, industrial, and construction market. The stock currently has a Zacks Rank #1 and a Value Score of B.
Miamisburg, OH-based Verso Corporation VRS 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
World Fuel Services Corporation INT is a leading global fuel services company, engaged in the distribution of fuel, and related products and services in the aviation, marine, and land transportation industries. The stock currently has a Value Score of B and a Zacks Rank #2. The 3-5 year EPS growth rate for the stock is estimated at 5%.
TrueBlue, Inc. TBI is a provider of specialized workforce solutions that help clients achieve business growth and improve productivity. It offers contingent staffing, recruitment process outsourcing, and contingent staffing management services in the United States, Canada and Puerto Rico. The stock currently has a Zacks Rank #2 and a Value Score of A.
Herndon, VA-based ePlus inc. PLUS provides information technology solutions to enable organizations to 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.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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