Investing in stocks after analyzing valuation metrics is considered one of the best practices. When considering valuation metrics, the price-to-earnings ratio has always been the obvious choice. This is because earnings-based calculations are easy and useful. However, the price-to-sales ratio is suitable for valuing stocks that are losing or in an early development cycle, generating little or no earnings.
What is the price-to-sales ratio?
While a loss-making company with a negative price-to-earnings ratio falls out of favor with investors, its price-to-sales may indicate the hidden strength of the business. This understated ratio is also used to identify a recovery situation or to ensure that a company’s growth is not overstated.
A stock’s price-to-sales ratio reflects how much investors pay for each dollar of revenue generated by a company.
If the price-to-sales ratio is 1, investors pay $1 for every $1 of revenue generated by the company. A stock with a selling price below 1 is a good deal since investors have 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.
The price-to-sales ratio is often preferred over price to earnings, as companies can manipulate their earnings by using different accounting measures. However, sales are more difficult to manipulate and are relatively reliable.
However, it should be kept in mind that a company with a high debt and a low price-to-sales ratio is not an ideal choice. The high level of debt will have to be repaid at some point, leading to further issuance of shares, an increase in market capitalization and, ultimately, a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot do the trick. Other ratios such as price/earnings, price/book and debt/equity should be analyzed before reaching any investment decision.
Digital Insurance (P – free report), Boise Cascades (BACs – free report), Lakeland Industries (Lake – free report), Expro Group Holdings (XPRO – Free Report) and The First Horizon (MFA – Free Ratio) are some companies with a low price-to-sales ratio and the potential to offer higher returns.
Price to sales less than average price to sales for its industry: The lower the price-to-sales ratio, the better.
Price-to-earnings using the F(1) estimate less than the average price-to-earnings for its industry: The lower the better.
Reserve price (equity) less than the average reserve price for its industry: This is another parameter to ensure the value feature of a stock.
Debt to equity (most recent) less than average 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: Shares must trade at a minimum of $5 or higher.
Zacks Rank Less Than or Equal to #2 (Buy): Zacks Rank #1 (Strong Buy) or 2 stocks are known to outperform regardless of the market environment.
Result of value less than or equal to B: Our research shows that stocks with an A or B value score, when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.
Here are five of the 11 stocks that qualified for consideration:
São Paulo, based in Brazil Digital Insurance provides financial technology solutions and services to micro-merchants, and small and medium-sized businesses in Brazil and internationally. The company offers multiple digital payment solutions, in-person payments via point-of-sale devices and prepaid card services. PagSeguro Digital has diversified its payments business and 2022 marked the consolidation of its HUBs initiative to expand its best-in-class services to small and medium-sized customers.
The company’s disciplined capital allocation has significantly helped generate operating and investing cash flow, positioning it to explore opportunities in payments and financial services in Brazil in the coming years. PAGS stock has a Value Score of A and currently has a Zacks Rank #1. You can be seen Complete list of today’s Zacks #1 Rank stocks here.
Boise Cascades is one of the largest manufacturers of engineered wood and plywood products in North America and a leading US wholesale distributor of building products. BCC is making good progress with investments in its existing asset base and organic growth projects by pursuing M&A that align with its strategy. Boise Cascade is on track with integration efforts related to the newly acquired BROSCO facilities.
The company is focused on implementing its strategies and has strong conviction that its investments will grow. BCC currently has a Zacks Rank #1 and has a Value Score of A.
Lakeland Industries operates as the leading global manufacturer of protective clothing for industry, healthcare and federal, state and local first responders. LAKE’s focus on high-value products and market diversification, particularly in fire services and industrial product lines, have aided its performance.
The company has been committed to its strategic acquisition pipeline and is focused on organic growth for the remainder of the fiscal year. LAKE currently has a Value Score of B and has a Zacks Rank #1.
e.g is an oil and gas service company. XPRO is a leading provider of energy services, offering innovative cost-effective solutions and best-in-class safety and quality. XPRO’s broad portfolio of capabilities includes well construction, well flow management, subsea well access and well intervention and integrity solutions.
The company’s agreement with Di Drill enables access to the broader offerings of the Well Intervention portfolio and an open channel for the deployment of Gyro equipment. The strategic partnership formalizes and strengthens the relationship between two energy service companies committed to providing premium well integrity solutions for complex well situations. XPRO currently has a Value Score of B and a Zacks Rank #2.
Based in Memphis, TN, The First Horizon is a financial services company. It offers diversified financial services, mainly through First Horizon Bank, which is its main subsidiary. First Horizon Bank’s main divisions and subsidiaries operate under the brands First Horizon Bank, IBERIABANK, First Horizon Advisors and FHN Financial. First Horizon continues to benefit from increased loan balances, along with improved net interest income. Also, the company’s inorganic growth strategies are likely to support top-line growth.
First Horizon has witnessed continuous credit growth. We believe the company is well positioned to witness growth in loans and deposits, with a strong business mix of regional and specialty banking franchises across its attractive and high-growth footprint. FHN’s capital distribution activities remain solid. FHN has a Value Score of B and currently has a Zacks Rank #1.
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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 the options 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 the options referred to in this material.
Disclosure: Performance information for Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
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