Low Price-to-Sales Ratio Stocks
by John Bajkowski
A number of research studies indicate that using price-to-sales ratios may lead to better investment results than price-to-book-value ratios or price-earnings ratios. Price-to-sales ratios (price divided by sales per share) may identify undervalued firms sooner than the price-earnings approach and avoid some of the accounting complications of the price-earnings and price-to-book screens.
Price-to-sales ratios are tied to expectations of future company growth, profitability, and risk. Industry knowledge is crucial. A simple screen for low price-to-sales ratios will tend to turn up firms in industries with low profit margins (income divided by sales) or poor sales growth prospects. The higher the expected growth, the higher the price-to-sales ratio that a stock can support. Higher profit margins should also translate into higher price-to-sales ratios. This issue’s First Cut looks for firms trading with price-to-sales ratios below the median for their industry, but with sales growth, profit margins, and price strength above the industry norm.
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The stocks passing the First Cut are domestic exchange-listed companies with positive one- and three-year sales growth rates that are higher than their industry medians coupled with operating and net profit margins above their industry medians. Operating profit margin (operating income divided by sales) examines the relationship between sales and management-controllable costs. Net profit margin (net income divided by sales) is the “bottom line” margin frequently quoted for companies. It indicates how well management has been able to turn revenues into earnings and may highlight a competitive advantage. The First Cut stocks have liabilities-to-assets ratios lower than their industry medians to establish a maximum level of financial leverage. Companies in more stable industries can safely assume greater levels of debt. The 30 firms with the highest relative price strength over the last 26 weeks and that have reported earnings exceeding the market consensus made the cut.
|
Company (Exchange: Ticker) |
Price-to- Sales Ratio |
Net Profit Margin |
Sales Growth Rate (3 Yr) |
Liabilities to Assets |
26-Wk Rel Strgth Rank (%) |
Share Price (8/13) ($) |
|||||
|
Firm (X) |
Indus (X) |
Firm (%) |
Indus (%) |
Firm (%) |
Indus (%) |
Firm (%) |
Indus (%) |
||||
| Industry | |||||||||||
| Coinstar, Inc. (M: CSTR) | 1.10 | 1.2 | 5.0 | -5.0 | 28.9 | 0.1 | 63.4 | 88.6 | 95 | 44.62 | Recreational Activities |
| MetroPCS Communications (N: PCS) | 0.81 | 1.2 | 5.5 | -0.1 | 31.0 | 6.7 | 67.7 | 74.5 | 92 | 8.76 | Communications Services |
| AMERIGROUP Corp. (N: AGP) | 0.35 | 0.6 | 3.1 | 1.4 | 22.4 | 11.2 | 48.8 | 61.9 | 92 | 38.10 | Healthcare Facilities |
| Medifast, Inc. (N: MED) | 2.02 | 3.4 | 7.4 | -22.0 | 30.7 | 14.5 | 25.5 | 49.7 | 92 | 27.91 | Biotechnology & Drugs |
| Boston Beer Company (N: SAM) | 2.04 | 2.1 | 9.2 | 7.2 | 13.3 | 9.1 | 35.1 | 53.6 | 91 | 64.94 | Beverages (Alcoholic) |
| ViroPharma Incorporated (M: VPHM) | 2.80 | 3.4 | 22.3 | -22.0 | 22.9 | 14.5 | 31.6 | 49.7 | 88 | 13.22 | Biotechnology & Drugs |
| LeMaitre Vascular, Inc. (M: LMAT) | 1.71 | 1.8 | 9.3 | -6.9 | 13.7 | 10.1 | 15.3 | 47.0 | 86 | 6.00 | Medical Equip & Supplies |
| BJ's Wholesale Club (N: BJ) | 0.21 | 0.3 | 1.3 | 0.8 | 6.2 | 2.2 | 51.2 | 66.9 | 84 | 42.90 | Retail (Spec'lty Non-Apparel) |
| IntegraMed America, Inc. (M: INMD) | 0.45 | 0.6 | 2.2 | 1.4 | 19.7 | 11.2 | 45.3 | 61.9 | 83 | 8.76 | Healthcare Facilities |
| Cornerstone Therapeutics (M: CRTX) | 1.38 | 3.4 | 7.7 | -22.0 | 103.0 | 14.5 | 20.4 | 49.7 | 83 | 6.26 | Biotechnology & Drugs |
| BMP Sunstone Corp. (M: BJGP) | 1.60 | 3.4 | 2.1 | -22.0 | 82.2 | 14.5 | 37.8 | 49.7 | 81 | 5.89 | Biotechnology & Drugs |
| Centene Corporation (N: CNC) | 0.24 | 0.6 | 2.1 | 1.4 | 31.1 | 11.2 | 56.0 | 61.9 | 78 | 21.03 | Healthcare Facilities |
| Bill Barrett Corporation (N: BBG) | 2.46 | 2.8 | 11.4 | -0.5 | 16.8 | 4.7 | 44.0 | 55.3 | 78 | 36.54 | Oil & Gas Operations |
| Republic Services, Inc. (N: RSG) | 1.39 | 1.4 | 4.7 | -4.1 | 38.7 | 7.3 | 60.7 | 66.7 | 76 | 29.40 | Waste Management Servs |
| MWI Veterinary Supply (M: MWIV) | 0.53 | 3.4 | 2.8 | -22.0 | 15.8 | 14.5 | 44.8 | 49.7 | 76 | 47.99 | Biotechnology & Drugs |
| Magellan Health Services (M: MGLN) | 0.51 | 0.6 | 4.7 | 1.4 | 16.1 | 11.2 | 32.5 | 61.9 | 74 | 43.88 | Healthcare Facilities |
| Ducommun Incorporated (N: DCO) | 0.46 | 0.8 | 3.1 | 3.0 | 10.5 | 10.1 | 29.6 | 57.1 | 73 | 18.70 | Aerospace and Defense |
| Ashland Inc. (N: ASH) | 0.46 | 0.6 | 3.0 | -1.4 | 3.8 | -1.0 | 60.1 | 60.6 | 73 | 49.09 | Fabricated Plastic & Rubber |
| Par Pharmaceutical (N: PRX) | 0.82 | 3.4 | 7.2 | -22.0 | 18.1 | 14.5 | 29.4 | 49.7 | 69 | 27.06 | Biotechnology & Drugs |
| Murphy Oil Corporation (N: MUR) | 0.48 | 2.8 | 4.3 | -0.5 | 9.9 | 4.7 | 43.4 | 55.3 | 67 | 54.82 | Oil & Gas Operations |
| TriQuint Semiconductor (M: TQNT) | 1.42 | 1.5 | 8.5 | 2.8 | 17.6 | -3.0 | 16.6 | 35.1 | 65 | 6.90 | Semiconductors |
| Clean Harbors, Inc. (N: CLH) | 1.07 | 1.4 | 6.2 | -4.1 | 9.0 | 7.3 | 56.0 | 66.7 | 65 | 60.43 | Waste Management Servs |
| Parke Bancorp, Inc. (M: PKBK) | 0.98 | 1.3 | 15.2 | 1.3 | 16.6 | 0.6 | 90.3 | 90.9 | 65 | 9.00 | Regional Banks |
| Cubist Pharmaceuticals (M: CBST) | 2.06 | 3.4 | 15.5 | -22.0 | 42.4 | 14.5 | 46.8 | 49.7 | 64 | 21.85 | Biotechnology & Drugs |
| Genesis Energy, L.P. (A: GEL) | 0.46 | 2.8 | 1.3 | -0.5 | 16.1 | 4.7 | 50.5 | 55.3 | 64 | 20.48 | Oil & Gas Operations |
| Cinemark Holdings, Inc. (N: CNK) | 0.83 | 0.9 | 6.5 | -18.8 | 17.4 | 5.0 | 71.3 | 96.2 | 62 | 15.51 | Motion Pictures |
| Virtusa Corporation (M: VRTU) | 1.16 | 1.8 | 7.1 | 0.0 | 9.7 | 8.0 | 15.7 | 51.3 | 60 | 8.80 | Software & Programming |
| HealthSpring, Inc (N: HS) | 0.37 | 0.4 | 6.0 | 3.0 | 26.8 | 9.7 | 34.7 | 62.7 | 60 | 18.45 | Insurance (Accid & Health) |
| Corn Products Int'l (N: CPO) | 0.63 | 0.8 | 4.9 | 3.5 | 11.9 | 8.0 | 43.9 | 50.9 | 58 | 32.35 | Food Processing |
| Watsco, Incorporated (N: WSO) | 0.60 | 0.9 | 2.3 | 1.2 | 4.2 | 1.0 | 47.0 | 57.0 | 57 | 53.00 | Misc. Capital Goods |
|
Exchange Key: A=American Stock Exchange; M=NASDAQ; N=New York Stock Exchange. Source: AAII's Stock Investor Pro, Thomson Reuters, and I/B/E/S. Data as of 8/13/2010. |
|||||||||||
| Field: | Operator: | Factor: | Compare to: | |
| Exchange | Not Equal | Over the counter | ||
| And | ADR/ADS Stock | Is False | ||
| And | Country | Contains | United States | |
| And | Industry | Not Equal | Real Estate Operations | |
| And | Industry | Not Equal | Misc. Financial Services | |
| And | Price | > | 5 | |
| And | Price/Sales | < | Industry Price/Sales | |
| And | Sales-Growth 12m | > | 0 | |
| And | Sales-Growth 12m | > | Industry Sales-Growth 12m | |
| And | Sales-Growth 3yr | > | 0 | |
| And | Sales-Growth 3yr | > | Industry Sales-Growth 3yr | |
| And | Operating margin 12m | > | Industry Operating margin 12m | |
| And | Net margin 12m | > | Industry Net margin 12m | |
| And | Total liabilities/assets Q1 | < | Industry Total liabilities/assets Q1 | |
| And | Relative Strength 26 week | > | Industry Relative Strength 26 week | |
| And | Relative Strength 26 week | > | 0 | |
| And | Quarterly Surprise-Difference | > | 0 |
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Discussion
For a 1st cut or any new screen, do you backtest it? And if so, would you share the results of some of your backtesting?
posted over 2 years ago by John from Florida
Another good screen from AAII. I have combined this with price/book, etc., for excellent returns
posted over 2 years ago by F paul from California
PS: my 10 dig no did not work used one I must have established with AAII. Keep up the good work re screens and screen research.
PPS: I hve used a linear combo of screen scores with good results - similar to Pet.'s point system.
I liked Cara S's mods to the Pet. screen. PLease have her do that regularly if possible?
posted over 2 years ago by F paul from California
Price/Sales ratio is a very good measure to evaluate growth stocks. Faber's report provide good critical remarks after experience with falsely reporting high sale figures of Sunbeam corporation when they counted sales twice, once when the product went in warehouse and again when it was sold. Usually profit does not increase in proportion with sales. One has to ask the question: Whether profit inncreses with increase in sales.
posted over 2 years ago by Girishbhai from Florida
We do not normally backtest the firstcut screens. However, an number of the screens have become part of the regular group of screens that are built into Stock Investor Pro and AAII.com
posted over 2 years ago by John Bajkowski from Illinois
