Investment in stocks made after an 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.
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 the business. This underrated ratio is also used to identify a recovery situation or ensure that a company’s growth is not overvalued.
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 ratio 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 ratio 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 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 36 stocks that qualified the screening:
G-III Apparel, Ltd. GIII is a manufacturer, designer and distributor of apparel and accessories under licensed brands, owned brands and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and women’s performance wear as well as women’s handbags, footwear, small leather goods, cold weather accessories and luggage. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5-year EPS growth rate of 11.6%.
DISH Network Corp. DISH offers pay-TV services under the DISH brand and Sling brand. The DISH TV brand provides a wide selection of video services, with access to hundreds of local, regional and national broadcast network channels, depending on the level of subscription. Sling TV services require an Internet connection and are available on multiple streaming-capable devices. DISH also offers add-on extras, pay-per-view events and a cloud-based DVR service. The stock currently has a Zacks Rank #2 and a Value Score of B. It has a 3–5-year EPS growth rate of 3.6%.
Tilly’s, Inc. TLYS is a casual apparel, footwear, and accessories retailer in the United States. It offers apparel, accessories and others merchandise for young men and women, and boys and girls. It also provides third-party merchandise assortment across various product categories. The stock currently has a Zacks Rank #1 and a Value Score of B. It has a 3–5-year EPS growth rate of 10%.
Janus Capital Group, Inc JHG is an asset management holding entity, providing services to institutional, retail, 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. The 3-5 year EPS growth rate for the stock is estimated at 9.8%. 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.
Luxembourg-based ArcelorMittal MT is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing world. It is the leader in all the main sectors – automotive, household appliances, packaging and construction. Its steel-making operations have significant geographic diversification with roughly 38% of its crude steel produced in the Americas, 47% in Europe and around 15% in other countries. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5 year EPS growth rate of 15.2%.
Vishay Intertechnology, Inc. VSH is a global manufacturer and supplier of semiconductors and passive components. Semiconductor products include metal oxide semiconductor field-effect transistors (MOSFETs), Diodes and Optoelectronic Components. These are typically used to perform functions such as switching, amplifying, rectifying, routing or transmitting electrical signals, power conversion, and power management. Semiconductors are sometimes referred to as “active components” because they require power to function. The stock currently has a Value Score of A and a Zacks Rank #2. It has a 3–5 year EPS growth rate of 20.3%.
Domtar Corporation UFS manufactures and distributes a wide array of fiber-based products including communication papers, specialty and packaging papers and absorbent hygiene products. Domtar also owns and operates an extensive network of strategically located paper and printing supplies distribution facilities. The company is the largest integrated marketer of uncoated freesheet paper in North America with established brands such as Cougar, Lynx Opaque Ultra, Husky Opaque Offset, First Choice and Domtar EarthChoice. The stock currently has a Value Score of B and a Zacks Rank #1.
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