AAII's Low Price-to-Sales Screen: Strong Performer in Mixed Market
by John Bajkowski
While Kenneth Fisher first popularized the use of price-to-sales ratios for stock selection in his 1984 book Super Stocks (McGraw-Hill Trade), price-to-sales ratios truly came in fashion during the Internet stock bubble as investors sought out ways to value stocks whose negative earnings rendered earnings-based models useless. Price-to-sales ratios (current price divided by the sales per share for the most recent 12 months) continue to be a useful stock selection approach even though most of the Internet stocks of the 1990s have faded away.
Proponents of the price-to-sales ratio argue that earnings-based approaches to selecting stocks are inferior because earnings are influenced by many management assumptions trickling through the accounting books. In addition, temporary developments such as costs incurred in the rollout of a new product or a cyclical slowdown can influence earnings more than sales, often leading to negative earnings.
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Price-to-sales figures are not perfect. Some industries traditionally sell with low price-to-sales ratios. A simple screen for just low price-to-sales ratios will tend to turn up many of these firms. A low price-to-sales ratio screen that considers industry factors is built into Stock Investor Pro, AAIIs fundamental stock screening program and research database. The screening criteria are:
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