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.

Investment in stocks made after an analysis of valuation metrics is usually 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, price-to-sales has emerged as a convenient tool to determine the value of stocks incurring losses or are in an early cycle of development, generating meager or no profits.

While a loss-making company with a negative price-to-earnings ratio falls out of investor 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.

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.

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 seven of the 32 stocks that qualified the screening:

Signet Jewelers Limited SIG is a retailer of diamond jewelry, watches as well as other products. The company operates in the United States, Canada, U.K., the Republic of Ireland, and the Channel Islands. The stock currently has a Zacks Rank #1 and a Value Score of A. It has a 3–5-year EPS growth rate of 8%.

New York-based GIII Apparel Group, LTD. GIII is a manufacturer, designer, and distributor of apparel and accessories under licensed brands, owned brands, and private label brands. The company’s portfolio includes outerwear, dresses, sportswear, swimwear, women’s suits and performance wear, women’s handbags, footwear, small leather goods, cold weather accessories, and luggage. G-III has more than 30 licensed and proprietary brands, including five major global brands — DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld. The stock currently has a Zacks Rank #1 and a Value Score of A.

Urban Outfitters, Inc. URBN is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gifts products. The company’s merchandise is generally sold directly to consumers through stores, catalogs, call centers and e-commerce platforms. The company has operations in the United States, Canada and Europe. The stock currently has a Zacks Rank #1 and a Value Score of B. It has a 3–5-year EPS growth rate of 18%.

Kinder Morgan, Inc. KMI is a leading midstream energy infrastructure provider in North America. The company operates pipelines spread across 83,000 miles to transport natural gas, crude oil, condensate, refined petroleum products, CO2 and other products. Kinder Morgan also owns 144 terminals utilized for storing liquid commodities comprising ethanol & chemicals and petroleum products. The terminals also store and transload petroleum coke, metals and ores. The 3-5 year EPS growth rate for the stock is estimated at 3%. The stock currently 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.

Brown County, WI-based Schneider National, Inc. SNDR is a leading transportation and logistics services company. The company offers a portfolio of premier truckload, intermodal and logistics solutions. It operates one of the largest for-hire trucking fleets in North America. In 2020, the company served approximately 9,250 customers, including many well-known companies. The stock currently has a Zacks Rank #2 and a Value Score of A. It has a 3–5 year EPS growth rate of 17.9%.

Hilltop Holdings Inc. HTH is a financial holding company. It provides consumer and business banking services through PlainsCapital Bank. It offers a wide range of financial products and services through broker-dealer (Hilltop Securities Inc. and Hilltop Securities Independent Network Inc.) along with mortgage origination (PrimeLending). The stock currently has a Value Score of A and a Zacks Rank #2.

Standard Motor Products, Inc. SMP is one of the leading manufacturers, distributors, and marketers of premium automotive replacement parts for engine management and temperature control systems. It majorly focuses on the heavy-duty industrial and original equipment market. The stock currently has a Value Score of B and a Zacks Rank #1.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your trial to the Research Wizard today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

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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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Hilltop Holdings Inc. (HTH) : Free Stock Analysis Report
 
Urban Outfitters, Inc. (URBN) : Free Stock Analysis Report
 
Signet Jewelers Limited (SIG) : Free Stock Analysis Report
 
Standard Motor Products, Inc. (SMP) : Free Stock Analysis Report
 
GIII Apparel Group, LTD. (GIII) : Free Stock Analysis Report
 
Kinder Morgan, Inc. (KMI) : Free Stock Analysis Report
 
Schneider National, Inc. (SNDR) : Free Stock Analysis Report
 
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