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.
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.
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 13 stocks that qualified the screening:
Hibbett Sports Inc. HIBB is a major athletic-inspired retailer with presence in small and mid-sized markets across the country. The company operates predominantly in the South, Southwest, Mid-Atlantic and Midwest regions of the United States. It provides high-quality assortment, including footwear, apparel, accessories and athletic equipment at competitive prices in convenient locations. The stock currently has a Zacks Rank #1 and a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 6.5%.
Shoe Carnival Inc. SCVL is a family footwear retailer in the United States. It sells dress, casual and athletic footwear products for men, women, and children, as well as accessories, including socks, belts, shoe care items, handbags, sport bags, backpacks, jewelry, scarves and wallets. The stock has a Zacks Rank #2 and a Value Score of A.
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 selected international markets. This Zacks Rank #2 company has a Value Score of A.
Israel Chemicals Ltd. ICL is a specialty minerals company with worldwide operations. The company's products include bromine specialty chemicals, potash, phosphate fertilizers, and specialty performance and industrial products. It markets its products primarily in Israel, Europe and the Americas. The company has an estimated 3-5 year EPS growth rate of 9.5%. The stock currently has a Value Score of A and a Zacks Rank #2.
Vipshop Holdings Limited VIPS is an online discount retailer for various brands in the People's Republic of China. The company offers apparel for men and women, shoes for casual and formal occasions and accessories for women and men. The stock currently has a Value Score of B and a Zacks Rank #2.
Westlake Chemical Partners LP WLKP operates, acquires and develops ethylene production facilities and related assets in the United States. It also sells ethylene co-products, including propylene, crude butadiene, pyrolysis gasoline, and hydrogen directly to third parties on a spot or a contract basis. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3-5 year EPS growth rate of 16%.
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 #2.
