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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.
JAKKS Pacific JAKK, GIII Apparel Group GIII, Sunoco SUN, Fidelis Insurance Holdings Limited FIHL and Employers Holdings, Inc. EIG are some companies with a low price-to-sales ratio and the potential to offer higher returns.
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.
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 five of the 12 stocks that qualified the screening:
JAKKS Pacific is a multi-brand company that designs and markets a broad range of toys and consumer products. JAKK has been benefiting from acquisitions, a solid international footprint, its focus on innovation, and collaborations with popular brands and movie franchisees. JAKKS Pacific has emerged as a diversified consumer products company, buoyed by numerous acquisitions over the past several years.
The company realized the importance of online retailing and focused on aggressively boosting online sales. JAKKS Pacific has been committed to creating digital experiences for online shoppers, such as videos, 360-degree product images and enhanced web pages. It continues to modify its sales and logistics capabilities to capitalize on this continued shift to online. JAKK currently sports a Zacks Rank #1 and has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
G-III Apparel is a manufacturer, designer and distributor of apparel and accessories under licensed, owned and private-label brands. GIII has accelerated digital growth. It strives to become the best omnichannel organization, enhancing the DKNY and Karl Lagerfeld Paris e-commerce platforms, and partnering with Amazon and Fanatics. Digital and omnichannel growth is a key priority.
GIII’s commitment to brand building, effective marketing, cost management and market expansion provides a solid foundation for continued growth and profitability in fiscal 2025 and beyond. The company's strategic initiatives leverage design and merchandising strengths to drive profitable sales growth through innovative products and collections. GIII Apparel has a Value Score of A and currently sports a Zacks Rank #1.
Dallas, TX-based Sunoco is a master limited partnership. The partnership’s prime business comprises the distribution of motor fuel to roughly 10,000 customers, including independent dealers, commercial customers, convenience stores, and distributors. Sunoco is a major wholesale motor fuel distributor in the United States, distributing more than 10 fuel brands through long-term contracts with above 10,000 convenience stores, ensuring steady cash flows.
Sunoco is poised to benefit from acquisitions aimed at diversifying its business portfolio. In 2024, the partnership completed the acquisition of NuStar Energy L.P. in an all-equity transaction. Sunoco’s Permian Basin Joint Venture with Energy Transfer, combining their respective crude oil and produced water-gathering pipelines, is anticipated to enhance the partnership’s distributable cash flow per Limited Partner (LP). SUN has a Value Score of B and flaunts a Zacks Rank #1 at present.
Fidelis is an insurance holding company. It has insurance and reinsurance operations in Bermuda, Ireland and the U.K. FIHL remains committed to optimizing its investment portfolio to achieve superior risk-adjusted returns. The company is focused on capital management, which drives its pursuit of value-accretive opportunities.
Fidelis’s top priority is reinvesting in the business and directing capital toward high-potential growth initiatives. Concurrently, the company strives to refine its outward reinsurance purchasing to enhance efficiency. FIHL has a Value Score of A and currently sports a Zacks Rank #1.
Henderson, Nevada-based Employers Holdings operates in the commercial property and casualty insurance industry, primarily in the United States. It is a specialty provider of workers' compensation insurance and services focused on small and mid-sized businesses engaged in low-to-medium hazard industries. The company specializes in delivering tailored insurance solutions that support workplace safety and financial protection for employers and their employees.
Employers Holdings invests in digital tools and platforms to streamline processes, improve customer experiences, and enhance operational efficiency. Initiatives include online quoting, policy management and claims processing systems. EIG has a Value Score of B and a Zacks Rank #2 at present.
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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