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.
JAKKS Pacific JAKK, UFP Industries UFPI, Sunoco SUN, The Greenbrier Companies, Inc. GBX and ChampionX Corporation CHX are some companies with a low price-to-sales ratio and the potential to offer higher returns.
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.
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 20 stocks that qualified the screening:
JAKKS Pacific is a multi-brand company that designs and markets a broad range of toys and consumer products. JAKK has been benefiting from acquisitions, a solid international footprint, its focus on innovation, and collaborations with popular brands and movie franchisees. JAKKS Pacific has emerged as a diversified consumer products company, buoyed by numerous acquisitions over the past several years.
The company realized the importance of online retailing and focused on aggressively boosting online sales. JAKKS Pacific has been committed to creating digital experiences for online shoppers, such as videos, 360-degree product images and enhanced web pages. It continues to modify its sales and logistics capabilities to capitalize on this continued shift to online. JAKK currently sports a Zacks Rank #1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
UFP Industries is a holding company with subsidiaries throughout North America, Europe, Asia and Australia. The company supplies wood, wood composite and other products in retail, industrial and construction markets. UFPI benefits from its focus on long-term business plans, product innovation, accretive acquisition strategies and rewarding shareholders.
Acquisitions have been UFP Industries’ preferred mode of solidifying its product portfolio and leveraging business opportunities. One of its five-year financial goals includes small tuck-in acquisitions, contributing to its goal of reaching annual unit sales growth of 7-10%. Product development is integral to UFP Industries’ strategies for its business units. The company’s investments in innovation and acceleration are poised to yield greater results in the upcoming periods. UFP Industries currently has a Value Score of A and a Zacks Rank #2.
Dallas, TX-based Sunoco is a master limited partnership. The partnership’s prime business comprises the distribution of motor fuel to roughly 10,000 customers, including independent dealers, commercial customers, convenience stores and distributors. Sunoco is a major wholesale motor fuel distributor in the United States, distributing more than 10 fuel brands through long-term contracts with above 10,000 convenience stores, ensuring steady cash flows.
Sunoco is poised to benefit from acquisitions aimed at diversifying its business portfolio. In 2024, the partnership completed the acquisition of NuStar Energy L.P. in an all-equity transaction. Sunoco’s Permian Basin Joint Venture with Energy Transfer, combining their respective crude oil and produced water-gathering pipelines, is anticipated to enhance the partnership’s distributable cash flow per Limited Partner. SUN has a Value Score of B and flaunts a Zacks Rank #1 at present.
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 B and currently flaunts a Zacks Rank #1.
The Woodlands, TX-based ChampionX is a global leader in chemistry solutions, artificial lift systems and advanced equipment, specializing in technologies that enhance oil and gas production. The company provides innovative solutions that improve efficiency, safety and sustainability throughout the energy lifecycle.
With a strong focus on digitalization, ChampionX offers real-time emission monitoring and data-driven insights to optimize operations. Its expertise and cutting-edge products support energy companies in maximizing production, improving transportation and reducing environmental impact worldwide. CHX currently has a Value Score of B 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
Zacks Names #1 Semiconductor Stock
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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 >>UFP Industries, Inc. (UFPI) : Free Stock Analysis Report
JAKKS Pacific, Inc. (JAKK) : Free Stock Analysis Report
Sunoco LP (SUN) : Free Stock Analysis Report
Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
ChampionX Corporation (CHX) : Free Stock Analysis Report
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