Use the Price-to-Sales Ratio to Find Winning Stocks — Like These 5

The P/S ratio is a powerful weapon in the value-hunter's arsenal

   

Use the Price-to-Sales Ratio to Find Winning Stocks — Like These 5

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.

Price-to-Sales Study

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.

 

1373993129 scaled 425 Use the Price to Sales Ratio to Find Winning Stocks    Like These 5

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.

Screen Parameters

  • 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

Stock Selections

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.

Learn how today with the Research Wizard.

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.


Article printed from InvestorPlace Media, http://investorplace.com/2014/06/stocks-to-buy-price-to-sales-ratio/.

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