Investment in stocks made after an analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, the 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 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 pay for each dollar of revenue generated by a company.
If the price-to-sales ratio is 1, investors are paying $1 for every $1 of revenues generated by the company. So, 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.
The 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 a 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, a 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 35 stocks that qualified the screening:
American Outdoor Brands AOUT provides outdoor products and accessories for rugged outdoor enthusiasts in the United States and internationally. It offers hunting, fishing, camping, shooting, and personal security and defense products. Its products include shooting supplies, rests, vaults, and other related accessories; lifestyle products; land management tools for hunting preparedness; harvesting products for post-hunt or post-fishing activities; electro-optical devices; and survival, camping, and emergency preparedness products. The company sells its products through e-commerce and traditional distribution channels under the Marksman, Defender, Harvester, and Adventure brands. The stock currently has a Zacks Rank #2 and a Value Score of A.
Brown County, WI-based Schneider National SNDR is a leading transportation and logistics services company. The company offers a portfolio of premier truckload, intermodal and logistics solutions. The company’s offerings include dry van, bulk transport, intermodal and supply chain management. It operates one of the largest for-hire trucking fleets in North America. In 2020, the company served approximately 9,250 customers, including many well-known companies. The stock currently has a Zacks Rank #1 and a Value Score of B. It has a 3–5-year EPS growth rate of 17.9%.
MarineMax, Inc. HZO is a recreational boat and yacht retailer in the United States. The company sells new and used recreational boats, including pleasure boats, boats, and sport cruisers; mega-yachts, sport yachts, and other yachts; fishing boats; motor and convertible yachts; pontoon boats; fishing boats; ski boats; and jet boats. It also provides marine parts and accessories, boat covers, trailer parts, water sport accessories, high-performance accessories and a line of boating accessories. The stock currently has a Zacks Rank #2 and a Value Score of A.
Minnesota-based The Mosaic Company MOS is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It was formed through the combination of the fertilizer businesses of agribusiness giant Cargill Incorporated and IMC Global Inc. Mosaic is the biggest integrated phosphate producer globally and is also among the four largest potash producers in the world. The 3-5 year EPS growth rate for the stock is estimated at 7%. 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.
Silicon Motion Technology SIMO is a leading developer of microcontroller ICs for NAND flash storage devices. The semiconductor company also designs, develops and markets high-performance, low-power semiconductor solutions for original equipment manufacturers (“OEM”) and other customers. The stock currently has a Zacks Rank #2 and a Value Score of B. It has a 3–5 year EPS growth rate of 8%.
TravelCenters of America Inc. TA operates travel centers and standalone restaurants in the United States and Canada. Its travel centers offer a range of products and services, including diesel fuel and gasoline, diesel exhaust fluid, and truck repair and maintenance, and roadside services. It also operates full-service and quick-service restaurants, and various customer amenities. It operates restaurants under the franchise agreement. The stock currently has a Value Score of A and a Zacks Rank #1.
Standard Motor Products, Inc. SMP is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. It majorly focuses on the heavy-duty industrial and original equipment market. The stock currently has a Value Score of A and a Zacks Rank #1.
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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.