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.
Avangrid AGR, PCB Bancorp PCB, Fidelis Insurance Holdings Limited FIHL, 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 13 stocks that qualified after the screening:
Avangrid is the third-largest solar and wind generator in the United States, with $44 billion of assets. The merger of Iberdrola U.S.A. with The UIL Holdings Corporation in December 2015 led to the formation of Avangrid. Iberdrola owns 81.6% of the outstanding shares of Avangrid. AGR has been committed to its organic growth strategy, emphasizing regulated and contracted investments to ensure steady earnings growth.
Avangrid introduced an electric vehicle portal and a self-service payment tool to enhance customer satisfaction, lower customer costs and improve cash flow. It has long-term plans to modernize its infrastructure further. Consistent investments, stable dividends, a solid liquidity position, and an expanding wind and solar generation portfolio act as tailwinds. AGR has a Value Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Los Angeles-based PCB Bancorp serves as the holding company for PCB Bank, offering a range of banking products and services tailored to small and medium-sized businesses, individuals and professionals in Southern California. Its offerings include demand deposits, savings accounts, money market accounts, time deposits and certificates of deposit.
PCB Bancorp also provides specialized services such as trade finance, remote deposit capture, courier deposit services, positive pay, zero balance accounts, and sweep accounts. The company’s strategic expansion and branch network optimization position it for sustained balance sheet growth and strong financial performance. PCB has a Value Score of B and a Zacks Rank #1.
Fidelis Insurance is an insurance holding company with insurance and reinsurance operations principally in Bermuda, Ireland and the United Kingdom. FIHL remains committed to optimizing its investment portfolio to achieve superior risk-adjusted returns. The company is focused on capital management drives its pursuit of value-accretive opportunities.
FIHL’s top priority is reinvesting in the business, directing capital toward high-potential growth initiatives. Concurrently, it strives to refine its outward reinsurance purchasing to enhance efficiency. FIHL has a Value Score of A and currently sports a Zacks Rank #1.
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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