The price-to-sales ratio is a terrific valuation metric that helps you find great stocks at great values. And given the recent run-up in stocks, value is becoming more and more important.
In fact, aside from the Zacks Rank, if I could only use one item to screen and pick stocks with, price-to-sales would be the one.
Let’s first start with a definition. The P/S ratio is simply price divided by sales.
If the P/S ratio is 1, that means you’re paying $1 for every $1 of sales the company makes. A price-to-sales ratio of 0.5 means you’re paying 50 cents for every $1 of sales the company makes. And so on.
As you might have guessed, the lower the price-to-sales ratio, the better.
One of the reasons I like the P/S ratio is because it looks at sales rather than earnings, as the P/E ratio does. Why? Because sales are harder to manipulate on an income statement than earnings.
I prefer to look for stocks with a P/S ratio under 1. Although I’m willing to go up to 4, depending on the industry.
But in my testing, as the illustration below shows, those with a price-to-sales ratio of 1 or less produced the best returns. Between 1 and 2 also outperformed pretty significantly. But once you got over 4, the odds were against you.
But the best way to use it, I’ve found, is to find stocks with a price-to-sales ratio below the median for its industry. And that’s what we’ll be focusing on in this week’s screen.
- Projected growth rate greater than or equal to projected growth rate for the S&P 500 — so above market growth rates.
- Last earnings surprise greater than 0 — a positive EPS surprise
- Last sales surprise greater than 0 — a positive sales surprise
- Zacks Rank less than or equal to 2 – only stocks with a Zacks Rank of a “Strong Buy” or “Buy” get through.
- Price-to-sales ratio less than or equal to median P/S for its industry — valuations that are lower than their industry.
- Price greater than or equal to $5
- Average 20-day volume greater than or equal to 100,000
Here are 5 stocks from this week’s list:
Outerwall (OUTR) — P/S = 0.63
Arris Group (ARRS) — P/S = 0.98
Sanderson Farms (SAFM) — P/S = 0.74
Avis Budget Group (CAR) – P/S = 0.74
Rite Aid (RAD) — P/S = 0.03
Sign up now for your two-week free trial to the Research Wizard and get the rest of the stocks on this list. Start using this screen and the price-to-sales ratio in your own trading. Or create your own strategies and test them first before you invest. Know what to buy and when to sell.
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.