Price-to-sales ratio holding true even during pandemic

THE virus-induced economic slump is playing havoc with company profits, and with many financial ratios. One that isn’t too distorted is the price-sales ratio.

That’s a stock’s price divided by the company’s sales per share. General Motors Co. (GM) has a low priceto-sales ratio of 0.26, Tesla Inc. (TSLA) has a high one, 10.93.

In normal times, the average price-to-sales ratio is about 1.5. Today, the average ratio is higher, at 2.1, partly because the Federal Reserve is keeping interest rates low, trying to goose a troubled economy.

The stocks I’m recommending today all sell for less than 1.0 times sales.

Some evidence for the usefulness of the price-tosales ratio can be found in this column’s history.

JOHN DORFMAN

Before today’s column, I’ve written 17 columns about this ratio. My recommendations have achieved an average 12-month return of 33.9 percent, compared to 8.3 percent for the Standard & Poor’s 500 Index.

Raytheon Technologies

The first stock I recommend today is Raytheon Technologies Corp. (RTX), formed by the merger of Raytheon Co. (RTN) and United Technologies Corp. (UTX). The merger was consummated in April.

The combined entity is a key U.S. defense contractor, producing Patriot missiles, radar for fighter jets, and many other military products. It also makes commercial aerospace products including Pratt & Whitney jet engines.

I think missile technology will be key to the U.S. defense program for many years to come. I think this stock is a bargain at 0.65 times revenue.

CVS

Weighing in at 0.31 times sales is CVS Health Corp. (CVS). Big-volume retailers usually have low price-tosales ratios because they operate on modest profit margins. CVS’s net margin, for example, usually ranges between 2.5 percent and 3.3 percent.

In the past ten years, CVS has averaged 0.50 on the price-to-sales ratio. Why is it even cheaper now? I think there are a few reasons.

Investors worry about more federal intervention in the health-care system, which could depress profits. And many investors didn’t like CVS’s acquisition of Aetna, a large health insurer.

I think that deal will work out okay, and I also like CVS’s Minute Clinics, where patients can see a nurse for care on a walk-in basis.

Sprouts

A mid-sized stock I like is Sprouts Farmers Market Inc. (SFM). A specialty grocer, it sells fresh produce and other groceries in California and several Southern states. It says that 90 percent of its foods are “natural or organic.”

The company has shown good growth the past five years, increasing revenue at a 19 percent annual clip and earnings at 13 percent. It has been profitable eight years in a row, with return on stockholders’ equity climbing most year.

The past two years Sprouts earned more than 25 percent on equity, a praiseworthy return. It appeared to be headed for an even better 2020 before the coronavirus epidemic hit. Now who knows what will happen. But at 0.49 times sales, it might pay to find out.

Disclosure: I own Raytheon for some clients. A hedge fund I manage is short Tesla.