Screen of the Week 10/26/2010: Price to Sales Ratio

This week, I’m going to focus on one of my favorite valuation metrics for determining a company’s under or overvaluation. Let’s first start with a definition. The Price to Sales ratio is simply: Price divided Sales

If the Price to Sales ratio is 1, then that means you’re paying $1 for every $1 of sales the company makes. A price to sales ratio of 2 means you’re paying $2 for every $1 of sales the company makes. As you might have guessed, the lower the Price the Sales ratio, the better. A price to Sales ratio of .5 means you’re paying 50 cents for every $1 of sales the company makes. And paying less than a dollar for a dollar’s worth of something is a good bargain.

One of the reasons I like the Price to Sales ratio is because it looks at sales rather than earnings like the P/E ratio does. And sales are harder to manipulate on an income statement than earnings. Secondly, I’d be hard pressed to find a screen where adding the Price to Sales ratio didn’t improve it.

For me, I prefer to look for stocks with a Price to Sales ratio under 1. Although, I’m willing to go up to 4, depending on the industry. But I’ve found that the best way to use it is to find stocks with a Price to Sales ratio below the median for its Industry.

And that’s what we’ll be focusing on in this week’s screen. Let’s first start with:

* Zacks Rank less than or equal to 2

(Only stocks with a Zacks Rank of a Strong Buy or Buy get through.)

* Projected Growth Rate greater than or equal to Projected Growth Rate for the S&P

(Above market growth rates.)

* Last Earnings Surprise greater than 0

(Positive EPS Surprise)

* Last Sales Surprise greater than 0

(Positive Sales Surprise)

* Price to Sales less than or equal to Median Price to Sales for its Industry

(Valuations that are lower than their Industry.)

* Price greater than or equal to $5

* Avg. 20 Day Volume greater than or equal to 100,000

Here are 5 stocks from this week’s list:

* DPZ – Domino’s Pizza, Inc.
* GILD – Gilead Sciences, Inc.
* HUN – Huntsman Corp.
* UFS – Domtar Corp.
* DIOD – Diodes Inc.

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.

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