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, Standard Motor Products SMP, 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 four of the 12 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. The company recently 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 presently 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.

Long Island City, NY-based Standard Motor is one of the leading manufacturers, distributors and marketers of premium automotive replacement parts for engine management and temperature-control systems. It primarily focuses on heavy-duty industrial and the original equipment market. Standard Motor’s customers in the automotive aftermarket comprise the largest national and regional retailers and distributors.

SMP is set to benefit from a positive trend in demand for automotive parts, driven by factors like a growing and aging vehicle population, a resurgence in historical driving mileage, and the high cost of new vehicles. The impending acquisition of Nissens will help SMP expand its geographic presence, establish a significant global growth platform and improve cost-saving efforts across all functional areas. SMP currently has a Value Score of A and a Zacks Rank #2.

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.

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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