Use The P/S Ratio To Find Value Stocks
Zacks Investment Research | Jan 19, 2017 07:40AM ET
Welcome to Episode #26 of the Value Investor Podcast
Every week, Zacks value stock strategist and the Editor of Zacks Value Investor portfolio service, Tracey Ryniec, talks about all things happening in the value stock universe, including her top stock picks.
Most value investors use the P/E ratio to search for value stocks but there are other ratios that Tracey thinks you should consider like the price-to-sales ratio (P/S).
The P/S ratio is price divided by sales. A ratio of 1.0 means you are paying $1 for every $1 in sales. So value investors should look for a P/S ratio under 1.0.
If it’s under 1.0, that means a value investor is paying less for those sales.
Why should a value investor care about sales at all?
Many like to use the P/S ratio because it’s harder to manipulate than the P/E or other ratios. After all, a sale means that widget has to be sold to a customer or that cheeseburger is purchased. It’s hard to make the sales numbers look better than they are. They are what they are.
Tracey ran a screen of Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks along with a P/S ratio under 1.0 and got 169 companies. These are five names that caught her eye.
5 Stocks With P/S Ratios Under 1.0
- American Airlines (AAL) has a P/S ratio of 0.6.
- DSW (DSW) is in the scary retail sector but it’s not apparel. Shoes are always a cheap way to update a wardrobe. It has a P/S ratio of 0.6.
- Lions Gate Entertainment (LGF.A) just bought out STARZ and now owns the Outlander series. It has a P/S ratio of only 0.8.
- Parker Drilling (PKD) is in the energy field which most investors have been ignoring. It has a P/S ratio of 0.7.
- Unitedhealth Group (UNH) just reported earnings and beat the Zacks Consensus again. It has one of the best earnings charts on the Street. It has a P/S ratio of only 0.8.
Investors shouldn’t stop with the P/S ratio, however. Dig in deeper to find out what the story is behind these stocks. Do the rest of the fundamentals look as good as the P/S ratio and the Zacks Rank?
Find out what else Tracey thinks about the price-to-sales ratio on this week’s podcast.
Want more insights from Tracey?
Check out her weekly Value Investor service to receive more in-depth analysis on value companies and see which stocks she thinks are the best bargains now.
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