Investing in stocks based on valuation metrics is considered a smart strategy. The price-to-earnings (P/E) ratio is often the go-to metric due to its simplicity and ease of use. However, the price-to-sales (P/S) ratio is more useful for evaluating stocks of companies that are unprofitable or in early growth stages, as it helps assess value when earnings are minimal or non-existent.
What is the Price-to-Sales Ratio?
While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales can indicate the hidden strength of the business. This underrated ratio is also used to identify a recovery situation or ensure a company's growth is not overvalued.
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 are paying $1 for every $1 of revenues generated by the company. 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 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 using various accounting measures. However, sales are harder to manipulate and are relatively reliable.
However, one should keep in mind that a company with a high debt and a low price-to-sales ratio is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, a rise in market cap and a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot do the trick. One should analyze other ratios like Price/Earnings, Price/Book and Debt/Equity before arriving at any investment decision.
GIII Apparel Group GIII, Peabody Energy BTU, JAKKS Pacific JAKK, The Greenbrier Companies, Inc. GBX and Pfizer PFE are some companies with a low price-to-sales ratio and the potential to offer higher returns.
Screening Parameters
Price to Sales less than the 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 the Median Price to Earnings for its Industry: The lower, the better.
Price to Book (Common Equity) less than the 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 the 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 be trading 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, 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 five of the 17 stocks that qualified after the screening:
G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed, owned and private-label brands. GIII has accelerated digital growth. It strives to become the best omnichannel organization, enhancing the DKNY and Karl Lagerfeld Paris e-commerce platforms, and partnering with Amazon and Fanatics. Digital and omnichannel growth is a key priority.
GIII’s commitment to brand building, effective marketing, cost management and market expansion provides a solid foundation for continued growth and profitability in fiscal 2025 and beyond. The company's strategic initiatives leverage design and merchandising strengths to drive profitable sales growth through innovative products and collections. GIII has a Value Score of A and currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Peabody Energy is engaged in the coal mining business in the United States, Japan, Taiwan, Australia, India, Brazil, Belgium, Chile, France, Indonesia, China, Vietnam, South Korea and Germany. The company operates through the Seaborne Thermal, Seaborne Metallurgical, Powder River Basin, Other U.S. Thermal, and Corporate and Other segments.
BTU supplies coal to electricity generators, industrial facilities and steel manufacturers. It also engages in marketing and brokering coal from other producers; trading coal and freight-related contracts; and providing transportation-related services. BTU presently has a Value Score of A and a Zacks Rank #2.
Based in Malibu, CA, JAKKS Pacific is a multi-brand company that has been designing and marketing a broad range of toys and consumer products. The company is benefiting from the FOB business model, acquisitions, a solid international footprint, a focus on innovation, and collaborations with popular brands and movie franchisees. The emphasis on the expansion of retail reach bodes well.
JAKK has emerged as a diversified consumer products company, buoyed by a string of acquisitions over the past several years. The company realized the importance of online retailing and shifted its focus to boosting online sales. JAKK currently has a Value Score of A and a Zacks Rank #2.
Greenbrier is a leading international supplier of equipment and services to global freight transportation markets. The company’s broad product lineup, extensive market relationships, supportive customer experience and deep commercial origination capabilities create a unique leadership position and enable ongoing success. These factors provide revenue visibility while supporting its profitable leasing business, which is growing through disciplined investments in leased railcar fleet and robust lease renewals.
The company is progressing well on its goals. Management expects a sustained financial performance amid healthy market demand. GBX has a Value Score of A and currently flaunts a Zacks Rank #1.
Based in New York, Pfizer markets a wide range of drugs and vaccines. The company’s Biopharma reporting segment includes three broad therapeutic areas — Primary Care, Specialty Care and Oncology. PFE has committed significant resources toward developing treatments in oncology, internal medicine, rare diseases, immunology, inflammation, vaccines and hospitals.
Pfizer expects better non-COVID operational revenue growth in the upcoming quarters, driven by its products like Vyndaqel and Prevnar; launches like Abrysvo, Velsipity and Penbraya; and newly acquired products, including those acquired from Seagen. Huge profits from its COVID-19 products strengthened its cash position. PFE currently has a Value Score of A and a Zacks Rank #2.
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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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With strong earnings growth and an expanding customer base, it's positioned to feed the rampant demand for Artificial Intelligence, Machine Learning, and Internet of Things. Global semiconductor manufacturing is projected to explode from $452 billion in 2021 to $803 billion by 2028.
See This Stock Now for Free >>Pfizer Inc. (PFE) : Free Stock Analysis Report
Peabody Energy Corporation (BTU) : Free Stock Analysis Report
JAKKS Pacific, Inc. (JAKK) : Free Stock Analysis Report
G-III Apparel Group, LTD. (GIII) : Free Stock Analysis Report
Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
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