When considering valuation metrics, price-to-earnings ratio has always been the obvious choice as 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, price-to-sales could indicate the hidden strength of its 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 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 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 versus a stock with a high price-to-sales ratio.
Price-to-sales is often preferred over 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 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 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 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 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 21 stocks that qualified the screening:
Low Price-to-Sales Stocks to Strengthen Your Portfolio: MGM Growth Properties (MGP)
MGM Growth Properties (NYSE:MGP) engages in owning, acquiring, and leasing casino resort properties in the United States. These resorts provide casino gaming, hotel, convention, dining, entertainment, retail and other amenities.
MGP stock currently has a Zacks Rank #2 and a Value Score of A. It also has an estimated 3–5 year EPS growth rate of 10%.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: Metlife (MET)
Metlife (NYSE:MET) is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management.
MET stock currently has a Zacks Rank #2 and a Value Score of A. The 3-5 year EPS growth rate for the stock is estimated at 11.4%.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: Citizens Financial Group (CFG)
Citizens Financial Group (NYSE:CFG) is a bank holding company for Citizens Bank, N.A. and Citizens Bank of Pennsylvania that provides retail and commercial banking products and services in the United States.
This Zacks Rank #2 company’s 3–5 year EPS growth rate is 21.1%. The stock has a Value Score of A.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: ArcelorMittal (MT)
Luxembourg-based ArcelorMittal (NYSE:MT) is the world’s leading steel and mining company. With a presence in more than 60 countries, it operates a balanced portfolio of cost competitive steel plants across both the developed and developing worlds.
The company has a Value Score of A and a Zacks Rank #2.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: Daqo New Energy (DQ)
People’s Republic of China-based Daqo New Energy (NYSE:DQ) manufactures and sells polysilicon and wafers in the People’s Republic of China.
This Zacks Rank #1 company has a 3-5 years EPS growth rate of 7% and a Value Score of A.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: Quanta (PWR)
Quanta (NYSE:PWR) is a leading national provider of specialty contracting services and one of the largest contractors serving the transmission and distribution sector of the North American electric utility industry.
Quanta Services has operations in the United States., Canada, Australia and other selected international markets. This Zacks Rank #2 company has a Value Score of B. The 3-5 year EPS growth rate for the stock is estimated at 8%.
Low Price-to-Sales Stocks to Strengthen Your Portfolio: Xcerra (XCRA)
Xcerra (NASDAQ:XCRA) is a provider of test and handling capital equipment, interface products, and test fixtures and related services to the semiconductor and electronics manufacturing industries worldwide. This Zacks Rank #2 company has a 3–5 year EPS growth rate of 12%. The stock has a Value Score of A.
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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.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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