Value style is considered one of the best practices when it comes to picking stocks. There are different valuation metrics to determine a stock’s inherent strength but a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we would suggest considering Price-to-Sales ratio as one of the key metrics.

A stock’s Price-to-Sales ratio reflects how much investors are paying for each dollar of revenues generated by the company. If Price-to-Sales ratio is 1, it means that investors are paying $1 for every $1 of revenues generated by the company. So, it goes without saying that a stock with Price-to-Sales below 1 is a good bargain, as investors need to pay less than a dollar for a dollar’s worth.

What Makes Price-to-Sales Ratio Attractive?

You must be wondering what makes Price-to-Sales ratio attractive, when the most widely used valuation metric is Price/Earnings. This is so because companies and managements can fiddle with their earnings using various accounting measures but sales are harder to manipulate and hence are relatively reliable.

Again, Price-to-Sales ratio helps to determine the value of stocks that are grappling with losses or are in the early stage of development, generating meager or no profits. While a loss-making company with a negative Price-to-Earnings ratio falls out of investors’ favor, its Price-to-Sales ratio could indicate the hidden strength in its business. This underrated ratio is also used to identify recovery situations or ensure that a company's growth is not overvalued.

However, one should keep in mind that a company with high debt and 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 and a rise in market cap and ultimately a higher Price-to-Sales ratio.

What’s the Optimum Strategy?

In any case, Price-to-Sales ratio used in isolation can’t do the trick. One should also analyze other ratios such as Price/Earnings, Price/Book, and Debt/Equity before arriving at any investment decision. Let’s check out the screening parameters for selecting true value stocks.

Price to Sales less than 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 Median Price to Earnings for its Industry: The lower, the better.

Price to Book (common Equity) less than 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 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: They must all be trading at a minimum of $5 or higher.

Zacks Rank less than or equal to #2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

Value Style Score equal to A: Our research shows that stocks with a Value Style Score of ‘A’ or ‘B’ when combined a Zacks Rank #1 or #2 offer the best opportunities in the value investing space.

Here are five of the nine stocks that qualified the screening:

Domtar Corporation (UFS - Analyst Report) , the designer, manufacturer, marketer and distributor of communication papers, specialty and packaging papers, and absorbent hygiene products in the U.S., Canada, Europe, Asia, and globally has a Value score of ‘A’ with a projected 3–5 year EPS growth rate of 3%. The stock flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Magna International Inc. (MGA - Analyst Report) is a producer and seller of automotive products. The stock, with a Zacks Rank #2 and a Value score of ‘A’, currently has a projected 3–5 year EPS growth rate of 11.7%.

Korea Electric Power Corp. (KEP - Analyst Report) is an integrated electric utility company engaged in the generation, transmission and distribution of electricity as well as development of electric power resources in Korea and globally. This Zacks Rank #2 stock’s 3–5 year EPS growth rate is pegged at 25%. The stock has a Value score of ‘A’.

Celestica Inc. (CLS - Snapshot Report) is a supply chain solutions provider in the communications, consumer, aerospace and defense, industrial, healthcare, energy, semiconductor equipment, servers, and storage end markets in the Americas, Asia and Europe. The stock currently has a Zacks Rank #2 and a Value score of ‘A’.

Haverty Furniture Companies Inc. (HVT - Snapshot Report) is a specialty retailer of residential furniture and accessories in the U.S. The stock currently has a Zacks Rank #2 and a Value score of ‘A’.