This week, I'm going to focus on the Price to Sales ratio for finding great stocks at great values.
The Price to Sales ratio is a great valuation metric. And given the recent run-up in stocks, value, to me, is becoming more and more important.
In fact, aside from the Zacks Rank, if I could only use one item to screen and pick stocks with, this item would be the one.
Definition
Let's first start with a definition.
The Price to Sales ratio is simply: Price divided by Sales
If the Price to Sales ratio is 1, that means you're paying $1 for every $1 of sales the company makes.
A price to sales ratio of 2 means you're paying $2 for every $1 of sales the company makes.
As you might have guessed, the lower the Price the Sales ratio, the better.
A price to Sales ratio of .5 means you're paying 50 cents for every $1 of sales the company makes.
And paying less than a dollar for a dollar's worth of something is a good bargain.
One of the reasons I like the Price to Sales ratio is because it looks at sales rather than earnings, like the P/E ratio does.
And sales are harder to manipulate on an income statement than earnings.
Secondly, I'd be hard pressed to find a screen where adding the Price to Sales ratio didn't improve it.
Price to Sales Study
For me, I prefer to look for stocks with a Price to Sales ratio under 1. Although, I'm willing to go up to 4, depending on the industry.
But in my testing, as the illustration below shows, those with a Price to Sales ratio of 1 or less produced the best returns. Between 1 and 2 also outperformed pretty significantly. But once you got over 4, the odds were against you.
- P/S range greater than or equal to 0 and less than or equal to 1:
Average Annual Return: 17.8% - P/S range greater than 1 and less than or equal to 2: Average Annual Return: 11.1%
- P/S range greater than 2 and less than or equal to 3: Average Annual Return: 7.3%
- P/S range greater than 3 and less than or equal to 4: Average Annual Return: 3.8%
- P/S range greater than 4: Average Annual Return: -7.9%
But the best way to use it, I've found, is to find stocks with a Price to Sales ratio below the median for its Industry.
And that's what we'll be focusing on in this week's screen.
Screen Parameters
• Projected Growth Rate greater than or equal to Projected Growth Rate for the S&P
(Above market growth rates.)
• Last Earnings Surprise greater than 0
(Positive EPS Surprise)
• Last Sales Surprise greater than 0
(Positive Sales Surprise)
• Zacks Rank less than or equal to 2
(Only stocks with a Zacks Rank of a Strong Buy or Buy get through.)
• Price to Sales less than or equal to Median Price to Sales for its Industry
(Valuations that are lower than their Industry.)
• Price greater than or equal to $5
• Avg. 20 Day Volume greater than or equal to 100,000
Stock Selections
Here are 5 stocks from this week's list:
BECN Beacon Roofing Supply
CORE Core-Mark Holding
HNI HNI Corp.
IART Integra LifeSciences
POST Post Holdings
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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.
POST HOLDINGS (POST): Free Stock Analysis Report
INTEGRA LIFESCI (IART): Free Stock Analysis Report
HNI CORP (HNI): Free Stock Analysis Report
CORE-MARK HLDG (CORE): Free Stock Analysis Report
BEACON ROOFING (BECN): Free Stock Analysis Report
Original post
Zacks Investment Research