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.

Sanmina Corporation SANM, PagSeguro Digital PAGS, Gibraltar Industries ROCK, PRA Group PRAA and Stifel Financial Corp. SF are some companies with a low price-to-sales ratio and the potential to offer higher returns.

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.

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 16 stocks that qualified the screening:

Sanmina is a global leader in integrated manufacturing solutions, offering a comprehensive range of services, including component manufacturing, product assembly, repair, logistics, and aftermarket support. With a presence across the Americas, the Asia Pacific, Europe, the Middle East and Africa, the company is recognized for its advanced technology capabilities and commitment to delivering high-quality solutions. Sanmina serves Original Equipment Manufacturers in critical industries, such as industrial, medical, defense, aerospace, automotive, communications networks and cloud infrastructure.

Committed to long-term growth, SANM continues to expand its market reach and diversify its portfolio, ensuring a balanced and resilient revenue stream. With a focus on delivering fully integrated, end-to-end solutions, Sanmina positions itself as the go-to partner for industry leaders. Looking ahead, the company remains confident in its ability to achieve sustainable growth, improve profitability and maximize shareholder value. SANM currently has a Zacks Rank #2 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

São Paulo, Brazil-based PagSeguro Digital provides financial technology solutions and services for micro-merchants, and small and medium-sized businesses in Brazil and internationally. The company offers multiple digital payment solutions, in-person payments via point-of-sales devices and prepaid card services. PagSeguro Digital has been diversifying its payment business and 2022 marked the consolidation of its HUBs initiative to extend its best-in-class services to small and mid-sized clients.

The company’s disciplined capital allocation has significantly aided operating and investing cash flow generation, positioning it to explore opportunities in payments and financial services in Brazil in the coming years. PAGS has a Value Score of A and currently flaunts a Zacks Rank #1.

Buffalo, NY-based Gibraltar Industries manufactures and distributes products to the industrial and buildings market. The products range from ventilation and expanded metal to mail storage solutions and rain dispersion products and solutions. ROCK has been benefiting from its focus on operational improvements and the Three-Pillar Strategy. The company continues to accelerate the implementation of three pillars through portfolio management initiatives, improvement of the business system and strengthening of the organization.

Gibraltar continues to accelerate its 80/20 initiatives in products and operations, optimizing the supply chain with market price actions. The company’s focus on the 80/20 initiative has propelled its Residential segment’s performance. Also, the high demand for agricultural facilities suggests a solid growth runway, especially for high-tech produce farms. ROCK has a Value Score of B and a Zacks Rank #2 at present.

PRA Group is a global financial and business services company in the Americas, Australia and Europe. Its primary business involves the purchase, collection and management of portfolios of nonperforming loans. The company’s solid inorganic growth story, strategic initiatives and improving cash collection position it well for long-term growth. Its improving portfolio supply, with continued credit normalization in the United States and better pricing in the domestic market, are major tailwinds. A positive purchasing environment benefits the firm.

PRAA is reaping the benefits of its decision to expand its presence beyond the primary debt collection business, stepping into government collections and audit services. Strategic acquisitions boost its performance. Key moves include the acquisition of eGov Systems to strengthen its government business, along with partnerships with the IRS and Banco Bradesco S.A. PRAA has a Value Score of B and currently flaunts a Zacks Rank #1.

The Saint Louis, Missouri-based Stifel serves as the bank holding company for Stifel, Nicolaus & Company, Incorporated. It operates across banking, securities and financial services through its wholly-owned subsidiaries. The company’s broker-dealer affiliates offer a range of services, including securities brokerage, investment banking, trading and investment advisory, catering to individual investors, professional money managers, businesses and municipalities.

SF remains committed to long-term growth, leveraging strategic initiatives to expand its business and enhance shareholder value. Stifel’s approach includes aggressive talent acquisition, strategic reinvestments and the leveraging of its robust capital position to maximize risk-adjusted returns. Additionally, the firm remains well-positioned to capitalize on improving market conditions, increased M&A activity, and regulatory shifts favoring capital markets. SF currently has a Value Score of B and sports a Zacks Rank #1.

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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