The coronavirus menace has not only wreaked havoc on communities but is affecting all business sectors, with social distancing being the only way to contain it. Apart dealing a solid blow to stock markets, the deadly virus has dented demand and supply across industries and nations. It has also led to slowing down of production activities and temporary closure of brick-and-mortar locations. As a result, U.S. consumer confidence in March 2020 fell to the lowest level since June 2017.
There remains immense uncertainty regarding how long the effects of COVID-19 will last. However, policymakers are leaving no stone unturned — slashing benchmark interest rate and announcing stimulus plan — to halt the economic meltdown. President Trump signed a $2-trillion economic relief package aimed at assisting workers, small industries and distressed companies on the brink of extinction. To further lessen the coronavirus-inflicted damage, the President is pushing for an infrastructure package, citing low interest rate environment.
While the world is busy fighting the novel coronavirus, there are several unanswered question on which investment strategy suits best at this time. Is it time to get rid of stocks in your portfolio and wait for a conducive investing environment? Or is it time to spot stocks that are trading cheap but are fundamentally sound considering their long-term prospects?
A Strategy to Suit the Situation
Investment in stocks made on analysis of valuation metrics is usually considered one of the best practices. When considering valuation metrics, price-to-earnings ratio has always been the obvious choice. This is because calculations based on earnings are easy and come in handy. However, price-to-sales has emerged as a convenient tool to determine the value of stocks that are incurring losses or are in an early cycle of development, generating meager or no profits.
While a loss-making company with a negative price-to-earnings ratio falls out of investor favor, its price-to-sales could indicate the hidden strength of its business. This underrated ratio is also used to identify a recovery situation or ensure that a company's growth is not overvalued.
A stock’s price-to-sales ratio reflects how much investors are paying for each dollar of revenues generated by a company.
If the 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 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.
Price-to-sales 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 high debt and low price-to-sales is not an ideal choice. The high debt level will have to be paid off at some point, leading to further share issuance, rise in market cap and ultimately a higher price-to-sales ratio.
In any case, the price-to-sales ratio used in isolation cannot do the trick. One should also analyze other ratios like Price/Earnings, Price/Book and Debt/Equity before arriving at any investment decision.
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: The stocks 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 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 seven of the 16 stocks that qualified the screening:
MGM Growth Properties LLC MGP engages in owning, acquiring, and leasing casino resort properties in the United States. The resorts provide casino gaming, hotel, convention, dining, entertainment, retail and other amenities. The stock currently has a Zacks Rank #2 and a Value Score of B. It also has an estimated 3–5 year EPS growth rate of 6.4%.
Darling Ingredients Inc. DAR produces, and sells natural ingredients from edible and inedible bio-nutrients. It offers ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bio-energy, and fertilizer industries. This Zacks Rank #2 company has a Value Score of A.
Englewood, CO-based DISH Network Corp. DISH is a holding company and operates two primary business segments — Pay-TV and Wireless. The company offers pay-TV services under the DISH brand and Sling brand. The company has invested over $11 billion to acquire certain wireless spectrum licenses and related assets since 2008. The company also has non-controlling investments in certain entities. The stock currently has a Value Score of B and a Zacks Rank #2.
PG&E Corp. PCG is the parent holding company of California’s largest regulated electric and gas utility, Pacific Gas and Electric Company. The utility generates revenues mainly through the sale and delivery of electricity and natural gas to customers. It engages in the business of electricity and natural gas distribution, electricity generation, procurement, and transmission, and natural gas procurement, transportation and storage. The utility also operates hydro-electric, nuclear and fossil fuel power plants. The 3-5 year EPS growth rate for the stock is estimated at 2.5%. The stock currently has a Value Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Rocky Brands RCKY is a manufacturer and seller of footwear and apparel in the United States, Canada and internationally. It sells products under the Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and Michelin brands. The stock currently has a Value Score of A and a Zacks Rank #1.
Hilltop Holdings Inc. HTH is a financial holding company registered under the Bank Holding Company Act of 1956. It provides consumer and business banking services through PlainsCapital Bank. It offers a wide range of financial products and services through broker-dealer (Hilltop Securities Inc. and Hilltop Securities Independent Network Inc.), mortgage origination (PrimeLending) and insurance (National Lloyds Corporation) divisions. The stock currently has a Zacks Rank #2 and a Value Score of A.
Piper Jaffray Companies PIPR operates as an investment bank and asset management firm. It primarily serves corporations, private equity groups, public entities, non-profit entities, and institutional investors in the United States and internationally. The company's Capital Markets segment offers investment banking and institutional sales, trading, and research services for various equity and fixed income products. Its Asset Management segment provides asset management services with product offerings in equity securities and master limited partnerships to institutions and individuals. The stock currently has a Value Score of A and a Zacks Rank #2.
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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.
Click to get this free report DISH Network Corporation (DISH) : Free Stock Analysis Report Hilltop Holdings Inc. (HTH) : Free Stock Analysis Report Pacific Gas & Electric Co. (PCG) : Free Stock Analysis Report Darling Ingredients Inc. (DAR) : Free Stock Analysis Report Rocky Brands, Inc. (RCKY) : Free Stock Analysis Report MGM Growth Properties LLC (MGP) : Free Stock Analysis Report Piper Jaffray Companies (PIPR) : Free Stock Analysis Report To read this article on Zacks.com click here.