Yahoo Finance Buy These 5 Low Price-to-Sales Stocks to Get Standout Returns
Investment in stocks after the analysis of the 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 calculations based on earnings are easy and come in handy. However, the price-to-sales ratio is convenient for determining the value of stocks that are incurring losses or in an early cycle of development, generating meager or no profit.
What’s Price-to-Sales Ratio?
While a loss-making company with a negative price-to-earnings ratio falls out of investors’ favor, its price-to-sales could indicate the hidden strength of the business. This underrated ratio is also used to identify a recovery situation or ensure that 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. So, 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 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, ultimately, a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot do the trick. One should also analyze other ratios like Price/Earnings, Price/Book and Debt/Equity before arriving at any investment decision.
AAR Corp. AIR, Signet Jewelers SIG, Vishay Intertechnology VSH, DCP Midstream, LP DCP and First American Financial FAF are some companies that have a low price-to-sales ratio and the potential to offer higher returns.
Screening Parameters
Price to Sales less than 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 Median Price to Earnings for its Industry: The lower, the better.
Price to Book (common Equity) less than 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 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: Zacks Rank #1 (Strong Buy) or 2 (Buy) 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 the screening:
AAR Corp provides various products and services to the worldwide aviation and defense industries. Its principal customers include The Boeing Company and Airbus. AIR continues to witness strong performance in its parts supply and program activities. Demand recovery in the commercial and leisure travel market should continue positively contributing to its operating results. The latest agreement with Collins Aerospace may allow it to gain from growth opportunities in the jet market.
AAR Corp announced a new exclusive distribution agreement with Collins Aerospace to supply de-icers and supporting products to the global aftermarket. The agreement also reflects AAR Corp.’s expansion into the business jet market, thereby reaping the benefits of the growth opportunities in this space. The company expects continued recovery in parts activities over the next several quarters. AIR currently sports a Zacks Rank #1 and has a Value Score of B.
Signet Jewelers is a retailer of diamond jewelry, watches and other products. The company operates in the United States, Canada, the U.K., the Republic of Ireland and the Channel Islands. Signet is often considered the leading retailer of diamond jewelry.
Signet’s Inspiring Brilliance strategy focuses on expanding big banners, boosting service revenues, broadening the Accessible Luxury and Value segments, and accelerating digital commerce. SIG currently has a Value Score of B and sports a Zacks Rank #1. It has a long-term earnings growth rate of 8%.
Vishay is a global manufacturer and supplier of semiconductors and passive components. Its semiconductor products include metal oxide semiconductor field-effect transistors, Diodes and Optoelectronic Components. These are typically used to perform functions such as switching, amplifying, rectifying, routing or transmitting electrical signals, power conversion, and power management.
Vishay is benefiting from strong automotive and industrial end-market demand. Automotive continues to remain the key driver due to the growing proliferation of electronic content in vehicles and the rising adoption of driver-assistance systems across the world. Further, solid demand for IoT censoring, infrastructure programs and alternative energy is driving VSH’s performance in the industrial market. The stock currently has a Value Score of A and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
DCP Midstream is a leading energy infrastructure firm. The Fortune 500 firm has a strong and sustainable business strategy, with a diversified portfolio of gathering, logistics, marketing and processing assets across nine states. DCP Midstream’s business model is designed to earn stable fee-based revenues from key midstream assets that are being utilized by shippers and customers over a long period.
Based in Denver, CO, DCP Midstream, a master limited partnership, was created in 2005. The leading midstream energy player is banking on strong fee-based earnings from its long-term contracted business related to logistics and marketing. The DCP stock currently has a Value Score of B and sports a Zacks Rank #1.
Santa Ana, CA-based First American Financial serves homebuyers and sellers, real estate professionals, loan originators and servicers, commercial property professionals, homebuilders, and others involved in residential and commercial property transactions, with products and services specific to their needs. The company should continue to benefit from strength in the commercial business and increased demand among millennials for first-time home purchases.
First American Financial has been actively pursuing acquisitions to strengthen its core business, and expand its valuation and data businesses. It also expects increased demand among millennials for first-time home purchases. Growing direct premiums, escrow fees and agent premiums should drive the company’s revenues. Prudent capital deployment through buybacks and dividend payments bodes well. The company 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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AAR Corp. (AIR) : Free Stock Analysis Report
Signet Jewelers Limited (SIG) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
Vishay Intertechnology, Inc. (VSH) : Free Stock Analysis Report
DCP Midstream Partners, LP (DCP) : Free Stock Analysis Report
