Many investors look towards various key ratios as a way to
determine the value of a company. The most common one is the
price-to-earnings, or P/E, ratio. Value investors use the P/E ratio
to determine if a stock is cheap. The lower the ratio the cheaper
the company.
However, the P/E ratio has its flaws. It is easier to manipulate
earnings than other aspects of a company's performance. That's why
I like to also use the price-to-sales, or P/S, ratio when I'm
looking for top stocks.
What Is The P/S Ratio?
The P/S ratio uses the market capitalization of a company and
divides it by the past 12 months' revenues. A low price-to-sales
ratio is preferred as that means an investor is paying less for
each sale.
It is more difficult for a company to tweak sales performance, than
it is to influence earnings, since it's pretty straightforward.
Therefore, the P/S ratio can be a better indicator of hidden value
than the P/E ratio.
What Ratio Do You Want To See?
Just like with the P/E ratio, the lower the P/S ratio is, the
better.
When seeking out attractive fundamentals, you want to look for
companies with P/S ratios under 1.0 as that usually indicates
value. But it can also be helpful to compare a company's P/S ratio
with those in its industry. Again, you want it to be lower than
those in its industry as that indicates that it is paying less than
its competitors for its sales.
Don't Only Use the P/S Ratio
The P/S ratio is not perfect. It shouldn't be the only fundamental
you're screening for.
It doesn't take debt into account so a company can have a low P/S
ratio but mounds of debt and therefore might not be a good
investment. It also doesn't account for expenses, which can affect
profit.
But if you combine the P/S ratio with other indicators, such as the
P/E ratio, and then put the Zacks Rank on top of that, it can be a
powerful combination for finding attractive stocks.
I did just that and found the following three companies, all of
which are cheap value stocks as well as Zacks #1 Rank (Strong
Buys).
3 Stocks With Dream P/S Ratios
- Phillips 66
- Trinity Industries
- HanesBrands
1. Phillips 66
(
PSX
) Phillips 66 has a well known name but the company is "new" having
been spun off from ConocoPhillips in early 2012. Phillips 66 is one
of the largest independent refiners in the U.S. with 15 refineries
and 15,000 miles of pipelines.
The favorable crack spread is currently holding at around the
$20/Bbl level. The industry refinery utilization rate has also
stabilized. The company is generating big cash flow and recently
raised its quarterly dividend by 25%. It currently yields 2.2%.
It's really cheap.
P/S ratio = 0.1
Forward P/E = 6.5
Zacks #1 Rank (Strong Buy)
2. Trinity Industries, Inc.
(
TRN
)
Trinity Industries is one of the largest railcar manufacturers in
North America. It also makes inland barges, highway guardrail and
crash cushions and its energy division makes structural wind tower
and tank containers. Railcars are seeing strong demand. As of June
30, 2012, the company had a $3.2 billion railcar backlog.
P/S ratio = 0.7
Forward P/E = 10.1
Zacks #1 Rank (Strong Buy)
3. HanesBrands
(
HBI
)
HanesBrands makes basic apparel and lingerie under several well
known name brands such as Hanes, Champion, Playtex, Bali, Wonderbra
and Gear for Sports.
On Oct 3, it reaffirmed full year guidance based on consumer and
retail trends through mid- to late September, including the Back to
School selling period.
P/S ratio = 0.7
Forward P/E = 12.7
Zacks #1 Rank (Strong Buy)
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Tracey Ryniec is the Value Stock Strategist for
Zacks.com
. She is also the Editor of the Turnaround Trader and Insider
Trader services. You can follow her on twitter at
@TraceyRyniec
.
HANESBRANDS INC (HBI): Free Stock Analysis
Report
HANESBRANDS INC (HBI): Free Stock Analysis
Report
PHILLIPS 66 (PSX): Free Stock Analysis Report
PHILLIPS 66 (PSX): Free Stock Analysis Report
TRINITY INDS IN (TRN): Free Stock Analysis
Report
TRINITY INDS IN (TRN): Free Stock Analysis
Report
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