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.
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.
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 30 stocks that qualified the screening:
Bassett Furniture Industries BSET is a home furnishing retailer with operations in the United States and internationally. It engages in designing, manufacturing, sourcing, distribution, and sale of furniture products to a network of company-owned and licensee-owned Bassett Home Furnishings retail stores, as well as independent furniture retailers; and wood and upholstery operations. The stock currently has a Value Score of A and Zacks Rank #1. It has a 3–5 year EPS growth rate of 16%.
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 #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 3.3%.
Silgan Holdings Inc. SLGN is a leading supplier of rigid packaging for consumer goods products. Its products are used in diverse end markets. It is the largest metal-container supplier for food products in North America. Silgan operates 100 manufacturing facilities in North and South America, Europe and Asia. This Zacks Rank #2 company has a Value Score of B. It has an estimated 3–5 year EPS growth rate of 5%.
The ODP Corporation ODP is one of the leading providers of business services, products and digital workplace technology solutions through an integrated B2B distribution platform. The ODP Corporation replaced Office Depot, Inc. on Nasdaq. The company reports through three segments: Business Solutions Division, also referred to as BSD, Retail Division and CompuCom Division. The 3-5 year EPS growth rate for the stock is estimated at 6.8%. The stock currently has a Value Score of A and 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 the original equipment market. The stock currently has a Value Score of B and a Zacks Rank #1.
DCP Midstream Partners, LP DCP owns and operates a portfolio of midstream energy assets in the United States. It owns and operates approximately 44 natural gas processing plants and 51,000 miles of natural gas gathering and transmission systems. It serves petrochemical and refining companies, and retail propane distributors. The stock currently has a Zacks Rank #1 and a Value Score of B.
Herndon, VA-based ePlus inc. PLUS provides information technology solutions to enable organizations optimize their information technology environment and supply chain processes in the United States. The stock currently has a Value Score of B and Zacks Rank #2.