Though Price-to-Earnings is the first thing to cross one’s mind while using valuation metrics, 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.
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.
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 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 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: 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 less than or equal to B: Our research shows that stocks with a Value Score of A or B when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.
Here are seven of the 19 stocks that qualified the screening:
United Natural Foods, Inc. UNFI is the leading distributor of natural, organic and specialty food and non-food products in the United States and Canada. The company carries more than 1,00,000 high-quality natural, organic and specialty products, consisting of national, regional and private label brands in six product categories. The stock currently has a Zacks Rank #2 and a Value Score of A. Also, the 3–5 year EPS growth rate for the stock is estimated at 5%.
MetLife Inc. MET is a leading provider of insurance and financial services to a broad spectrum of individual and institutional customers. Through its various subsidiaries and affiliates, the company provides individual insurance, annuities, and investment products. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 9%. The stock has a Value Score of A.
SK Telecom Co., Ltd. SKM is a provider of wireless telecommunications services in South Korea. The company offers wireless voice transmission services, cellular global roaming services, and interconnection services to connect its networks to fixed-line and other wireless networks. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 7.7%. The stock has a Value Score of A.
Avnet, Inc. AVT is one of the world’s largest distributors of electronic components and computer products. It has a 3–5 year EPS growth rate of 9.1%. The stock currently has a Value Score of A and a Zacks Rank #2.
The Greenbrier Companies, Inc. GBX is a manufacturer and seller of railroad freight car equipment in North America and Europe. This Zacks Rank #1 company’s 3–5 year EPS growth rate is 9.5%. The stock has a Value Score of A.
Universal Forest Products Inc. UFPI engineers, manufactures, treats, distributes and installs lumber, composite wood, plastic and other building products. The stock currently has a Zacks Rank #1 and a Value Score of B. The 3–5 year EPS growth rate for the stock is estimated at 10%.
Hartsville, South Carolina-based Sonoco Products Company SON was founded in 1899 and produces and sells industrial and consumer packaging products in North and South America, Europe, Australia, and Asia. This Zacks Rank #2 company’s 3–5 year EPS growth rate is 4.7%. The stock has a Value Score of B.