3 Stocks With Dream P/S Ratios
Investors use various key ratios as a way to determine the value of a company. The most common one is the price-to-earnings, or P/E, ratio.
Value investors often use the P/E ratio to determine if a stock is cheap. The lower the ratio the cheaper the company.
However, the P/E ratio has its flaws. It is easier to manipulate earnings than other aspects of a company's performance. That's why I like to also use the price-to-sales, or P/S, ratio when I'm looking for top value stocks.
What Is The P/S Ratio?
The P/S ratio uses the market capitalization of a company and divides it by the past 12 months' revenues. A low price-to-sales ratio is preferred as that means an investor is paying less for each sale.
It is more difficult for a company to tweak sales performance, than it is to influence earnings, since it's pretty straightforward. A sale is a sale. It's harder for a company to move money around and produce it. Therefore, the P/S ratio can be a better indicator of hidden value than the P/E ratio.
What Ratio Do You Want To See?
Just like with the P/E ratio, the lower the P/S ratio is, the better.
When seeking out attractive fundamentals, you want to look for companies with P/S ratios under 1.0 as that usually indicates value. But it can also be helpful to compare a company's P/S ratio with those in its industry. Again, you want it to be lower than those in its industry as that indicates that it is paying less than its competitors for its sales.
Don't Only Use the P/S Ratio
The P/S ratio is not perfect. It shouldn't be the only fundamental you're screening for.
It doesn't take debt into account so a company can have a low P/S ratio but mounds of debt and therefore might not be a good investment. It also doesn't account for expenses, which can affect profit.
But if you combine the P/S ratio with other indicators, such as the P/E ratio, and then put the Zacks Rank on top of that, it can be a powerful combination for finding attractive stocks.
I did just that and found the following three companies, all of which are cheap value stocks as well as Zacks #1 Rank (Strong Buys) with Value Style Scores of A.
How About Growth Too?
Strangely, after running the screen for low P/S ratios and P/E ratios plus the Rank and Style Scores, I noticed that the growth rates on many of these companies were also in the double digits for 2015.
Being greedy, I decided I would add the growth component to my criteria as well.
All three of the stocks I chose also have low PEG ratios, which measures both value AND growth. It's rare to have both of those features in a stock, especially so late in this bull market.
It's really the best of all worlds, then, with these three stocks. I started out looking for the best stocks with the lowest P/S ratios. I ended up with that PLUS the growth.
What more could an investor ask for?
3 Stocks With Dream P/S Ratios
- Outerwall Inc.
- Stepan Company
- Wabash National Corporation
1. Outerwall Inc. (OUTR - Snapshot Report)
Outerwall operates over 40,000 Redbox kiosks that rent video game and movies. It also owns 20,000 coin-counting kiosks throughout the United States operated under its Coinstar brand.
The company crushed the Zacks Consensus in the first quarter by 71% as Redbox revenue hit a record. Outerwall has been raising Redbox prices but, so far, the consumer is absorbing the increases.
P/S ratio = 0.6
P/E ratio = 9.3
Earnings expected to rise 28% in 2015
PEG ratio = 0.8
Zacks Rank #1 (Strong Buy)
Zacks Style Score for Value and Growth = A
2. Stepan Company (SCL - Snapshot Report)
Stepan is a specialty chemical company that makes surfactants, polymers and specialty products for the food, supplement and pharmaceutical industries.
In the first quarter, the surfactants segment saw record quarterly operating income as surfactant and polymer volumes increased 2% and 5%, respectively.
P/S ratio = 0.6
P/E ratio = 15
Earnings expected to rise 39% in 2015
PEG ratio = 0.8
Zacks Rank #1 (Strong Buy)
Zacks Style Score for Value and Growth = A
3. Wabash National (WNC - Snapshot Report)
Wabash National makes semi trailers and liquid transportation systems, including dry freight vans, refrigerated vans, platform trailers, liquid tank trailers, and intermodal equipment.
First quarter net sales were a record, jumping 22%. Momentum coming out of 2014 accelerated. As a result, Wabash National was one of the few companies during last quarter's earnings season to raise its full year earnings guidance.
P/S ratio = 0.5
P/E ratio = 11.5
Earnings expected to rise 33% in 2015
PEG ratio = 0.5
Zacks Rank #1 (Strong Buy)
Zacks Style Score for Value = A
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