Investing in stocks after analyzing valuation metrics is considered one of the best practices. When looking at valuation metrics, price-to-earnings has always been the obvious choice. This is because calculations based on income are simple and practical. However, the price-to-sales ratio is useful in determining the value of stocks that are suffering losses or are in the early stages of development with little or no gains.
What is the price to sales ratio?
As a loss-making company wins investors’ favor with a negative price-to-earnings multiple, its price-to-sales multiple could point to the company’s hidden strength. This underestimated ratio is also used to identify a recovery situation or to ensure a company’s growth is not being overstated.
A stock’s price-to-sales ratio reflects how much investors pay for every dollar of sales a company makes.
If the price-to-sales ratio is 1, investors pay $1 for every $1 in sales the company generates. So a stock with a price-to-sales ratio of less than 1 is a good deal, since investors are paying less than a dollar for a dollar’s worth.
Therefore, a stock with a lower price-to-sales ratio is a better investment than a stock with a high price-to-sales ratio.
The price-to-sales ratio is often preferred to the price-to-earnings ratio because companies can use various accounting techniques to manipulate their earnings. However, sales are more difficult to manipulate and relatively reliable.
However, it’s worth remembering that a company with high levels of debt and a low price-to-sales ratio isn’t an ideal pick. The high level of debt must eventually be repaid, leading to further share issuance, an increase in market cap, and ultimately a higher price-to-sales ratio.
In any case, the price-to-sales ratio alone cannot suffice. One should also analyze other metrics such as price/earnings, price/book value, and debt/equity before making an investment decision.
AAR Corp. (AIR – free report) SK Telecom Co. (SKM – free report) Pro Petro Holding Corp. (PUMP – free report) Cirrus Logic Inc. (CRUS – Free report) and First American Finance (FAF – Free Report) are some companies that have low price-to-sales multiples and the potential to offer higher yields.
Price to sale less than median price to sale for its industry: The lower the price-to-sales ratio, the better.
Price-earnings estimate using F(1) is below the median price-earnings ratio for its industry: The lower the better.
Price book value (share capital) less than median price booking for its industry: This is another parameter to ensure the value of a stock.
Debt to equity (latest) 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 shares 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 for outperforming regardless 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 combined with a Zacks Rank of #1 or #2 offer the best value investing opportunities.
Here are five of the 17 stocks that qualified for screening:
AAR Corp offers various products and services for the worldwide aerospace and defense industry. Its main customers are The Boeing Company and Airbus. AIR continues to see strong performance in parts supply and program activities. Recovery in demand in the business and leisure travel markets should continue to contribute positively to operating results. The recent deal with Collins Aerospace could allow it to capitalize on opportunities in the jet market.
AAR Corp announced an exclusive distribution agreement with Collins Aerospace to supply deicers and support products to the global aftermarket. The agreement also reflects AAR Corp’s expansion into the business jet market, taking advantage of growth opportunities in this space. The company expects a continued recovery in parts activity over the next few quarters. AIR currently has a Zacks Rank of #1 and a Value Score of B.
SK Telecom is a wireless telecommunications service based in South Korea. The company has been at the forefront of mobile communications growth since 1984. SKM is focused on taking the customer experience to a new level by going beyond connectivity. The company’s fixed and mobile telecom businesses maintain solid market leadership, while new growth companies such as Media, Enterprise and AVERSE have delivered tangible results.
By putting artificial intelligence (“AI”) at the heart of its business, SK Telecom is rapidly transforming into an AI company. It focuses on driving innovation in telecom, media, AI, metaverse, cloud and connected intelligence to deliver greater value to both individuals and businesses. SKM has a Value Score of A and currently has a Zacks Rank #1.
Pro Petro Holding is an oilfield service provider principally operating in the Permian Basin, which stretches across West Texas and New Mexico. The Company offers a wide range of specialized, ancillary services and equipment for oil and natural gas exploration and production. About 99% of ProPetro’s total revenue comes from the Permian Basin. ProPetro, with its healthy leverage on the Permian Basin, is likely to benefit from this multi-year upcycle by offering hydraulic fracturing and other well completion services to E&P companies.
ProPetro’s $400 million purchase of Pioneer Natural Resources’ Permian pressure pump equipment has resulted in a significant increase in ProPetro’s horsepower base in its hydraulic fracturing fleets. The acquisition also includes a strategic 10-year service agreement covering approximately 30% of the entire fleet. As Pioneer Natural Resources is one of the largest E&P operators in Perm and is still expanding in the shale field, the long-term contract is expected to provide a stable revenue base for ProPetro. PUMP stock has a Value Score of A and is currently ranked #1 by Zacks. You can see the full list of today’s Zacks #1 Rank stocks can be found here.
Headquartered in Austin, Texas, cirrus logic is a fabless semiconductor company that designs, manufactures and markets analog, mixed-signal and audio DSP integrated circuits (ICs). The company’s chips are used in a variety of industrial and consumer markets, including portable and non-portable media players, smartphones, tablets, home theater receivers, in-car entertainment systems, televisions, docking stations and wearables including smart watches, action cameras, smart bands and VR -Headsets.
Apart from that, its mixed-signal converter chips are used in energy-related applications such as digital utility meters and LED controllers for the incandescent lamp replacement market. Cirrus Logic benefits from sustained dynamics in its high-performance mixed-signal and audio segments. It plans to expand its product line by investing in next-gen technologies like wearables, gaming, and AR/VR. CRUS plans to develop a 22-nanometer intelligent codec and custom boosted amplifier to expand its presence in the audio market. CRUS stock currently has a Value Score of B and a Zacks Rank of #2.
Located in Santa Ana, CA First American Finance serves home buyers and sellers, real estate professionals, lenders and managers, commercial real estate professionals, builders and others involved in residential and commercial real estate transactions with products and services specifically tailored to meet their needs. The company should continue to benefit from strength in the commercial business and increased demand from millennials for first-time home buyers.
First American Financial has actively pursued acquisitions to strengthen its core business and grow its ratings and data businesses. It also anticipates increased demand among millennials for first-time homebuyers. Growing direct premiums, escrow fees, and agent premiums should boost the company’s earnings. Prudent use of capital through buybacks and dividend payments bodes well. The company currently has an A value score and a #2 Zacks rank.
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