While Price-to-Earnings is the first to cross one’s mind when using valuation metrics, Price-to-Sales has emerged as a convenient tool to determine the value of stocks that are suffering losses or are in an early cycle of development, generating meager or no profits.
Though a loss-making company with a negative Price-to-Earnings ratio falls out of investors’ favor, its Price-to-Sales could indicate the hidden strength in its business. This underrated ratio is also used to identify recovery situations or ensure that a company's growth is not overvalued.
Price-to-Sales is often preferred to Price-to-Earnings, as companies and managements can fiddle with their earnings using various accounting measures. However, sales are harder to manipulate and are relatively reliable.
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 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 more suitable for investment versus a stock with a high Price-to-Sales ratio.
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 and a rise in market cap and ultimately a higher Price-to-Sales ratio.
In any case, the Price-to-Sales ratio used in isolation can’t do the trick. One should also analyze other ratios like Price/Earnings, Price/Book, 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: They 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 Style Score equal to A: Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.
Here are 5 of the 12 stocks that qualified the screening:
DeVry Education Group Inc. DV, an educational services provider worldwide, has a Zacks Rank #2 and a Value score of ‘A.’ The company’s expected EPS growth rate for 3–5 years currently stands at 8.7%.
Trinity Industries Inc. TRN, based in Dallas, TX, provides products and services to the energy, transportation, chemical, and construction sectors in the U.S. and internationally. This Zacks Rank #1 stock has a 3–5 years EPS growth rate of 10% and a Value score of ‘A.’
CVR Refining, LP CVRR is an independent petroleum refiner and marketer of transportation fuels in the United States. The stock currently has a Zacks Rank #1 and a Value score of ‘A.’ The company’s projected 3–5 year EPS growth rate is 18.1%.
Standard Motor Products Inc. SMP is a manufacturer and supplier of replacement motor parts in the automotive aftermarket industry. The stock with a Zacks Rank #2 and a Value score of ‘A’ currently has a projected 3–5 year EPS growth rate of 18%.
Korea Electric Power Corp. KEP, also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #1 stock has a 3–5 year EPS growth rate of 25% and a Value score of ‘A.’
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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