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.
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.
Price-to-sales is often preferred to 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.
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 16 stocks that qualified the screening:
Advance Auto Parts, Inc. AAP operates in the U.S. automotive aftermarket industry. It is primarily engaged in selling replacement parts (excluding tires), accessories, batteries and maintenance items for domestic and imported cars, vans, sport utility vehicles, light and heavy-duty trucks. It is a leading automotive parts provider in North America, serving “do-it-yourself” or “DIY”, and “do-it-for-me” or “DIFM” (or Commercial) customers. This Zacks Rank #1 company has a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated at 12.9%.
Arcosa, Inc. ACA offers infrastructure-related products and services for the construction, energy and transportation markets in North America. The company’s principal business segment consists of Construction Products Group, the Energy Equipment Group and the Transportation Products Group. The 3-5 year EPS growth rate for the stock is estimated at 3.4%. The stock currently has a Value Score of B and Zacks Rank #2.
Perion Network Ltd. PERI is a global technology company that delivers online advertising solutions and search monetization to brands and publishers in North America, Europe and internationally. It is committed to providing digital advertising solutions to capture consumer attention and drive engagement, as well as delivers ads across a portfolio of websites and mobile applications. This Zacks Rank #2 company has a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 6%.
Big Lots, Inc. BIG is a broad-line closeout retailer in the United States. It offers products under various merchandising categories, which include Food, Consumables, Furniture, Seasonal, Soft Home, Hard Home, Electronics and Toys & Accessories. The 3-5 year EPS growth rate for the stock is estimated at 4.5%. The stock currently has a Value Score of A and Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vera Bradley, Inc. VRA is a designer, manufacturer and seller of women’s handbags, luggage and travel items, fashion and home accessories and gifts. It sells its Vera Bradley branded products through its full-line and factory outlet stores in the United States, and verabradley.com, an online outlet site, as well as its annual outlet sale in Fort Wayne, IN. The stock currently has a Zacks Rank #1 and Value Score of A.
Zaandam, the Netherlands-based Koninklijke Ahold Delhaize N.V. ADRNY was founded in 1887 and operates retail food stores primarily in the United States and Europe. The company offers supermarket, superstore, online shopping, online grocery shopping, small supermarket, convenience store, drugstore, wine and liquor store, online shopping for general merchandise, compact hyper and supermarket, and hypermarkets store formats. This Zacks Rank #2 company’s 3-5 year EPS growth rate is expected to be 4.7%. The stock has a Value Score of A.
AAR Corp. AIR provides various products and services to the aviation and defense industries worldwide. Its principal customers include The Boeing Company and Airbus. The company reports through two business segments — Aviation Services and Expeditionary Services. The stock currently has a Value Score of B and Zacks Rank #2.
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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.
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Big Lots, Inc. (BIG): Free Stock Analysis Report
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