It is essential to assert the value of stocks before investing. Following this principle, investors always compare the value of stocks using various valuation metrics at disposal. While Price-to-Earnings is the first to cross one's mind when using valuation metrics, Price-to-Sales has emerged as a useful measure in narrowing down the list of valuable stocks.
Price-to-Sales helps to determine the value of stocks that are suffering losses or are in the early cycle of development, generating meager or no profits. Though a loss-making company with a negative Price-to-Earnings ratio falls out of investors' favor, its Price-to-Sales could indicate the hidden strength in its business. This underrated ratio is also used to identify recovery situations or ensure that a company's growth is not overvalued.
Price-to-Sales is often preferred to Price-to-Earnings, as companies and managements can fiddle with their earnings using various accounting measures. However, sales are harder to manipulate and are relatively reliable.
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.
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, 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 equal to A: Our research shows that stocks with a Value Style Score of 'A' or 'B' when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.
Here are five of the 10 stocks that qualified the screening:
United Natural Foods Inc.UNFI , a leading distributor of natural, organic and specialty food and non-food products in the U.S. and Canada, has a Zacks Rank #1 and a Value score of 'A.' The company's expected EPS growth rate for 3-5 years currently stands at 8.7%.
Argo Group International Holdings, Ltd.AGII , based in Pembroke, Bermuda, underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. This Zacks Rank #2 stock has a 3-5 years EPS growth rate of 7% and a Value score of 'A.'
Bunge LimitedBG is a global agribusiness and food company. The stock currently has a Zacks Rank #1 and a Value score of 'A.' The company's projected 3-5 year EPS growth rate is 9.2%.
Greif Inc.GEF is a consumer goods' company that produces and sells industrial packaging products worldwide. The stock with a Zacks Rank #2 and a Value score of 'A' currently has a projected 3-5 year EPS growth rate of 8.7%.
Korea Electric Power Corp.KEP , also known as KEPCO, is an integrated electric utility engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in South Korea. This Zacks Rank #2 stock has a 3-5 year EPS growth rate of 25% and a Value score of 'A.'
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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 .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.