Price-to-sales ratio key for turnaround stocks

SUPPOSE you had the opportunity to buy a big, lumbering company with huge sales but slender profits. Would you do it?

You would if you thought you could turn the company around.

Perhaps you could improve the product, raise prices, cut expenses or find other ways to improve those puny profits.

Investors who are looking for turnaround candidates often use the price-to-sales ratio. To compute it, divide a stock’s price by the company’s sales per share. For example, Coca-Cola Co. (KO) has 4.3 billion shares outstanding and has revenue of around $33 billion.

That works out to $7.33 a share in sales. The stock fetched $54.48 at this writing, so the price-to-sales ratio was 7.43. That’s a high ratio, because Coca-Cola is a popular stock with high profit margins. Most stocks these days sell for between two- and three-times sales. Unpopular stocks with low profit margins sell for

1.0 times sales or less. I’m going to recommend some of those unpopular stocks today.

The record

Beginning in 1998, I’ve written 18 columns about stocks with low price/ sales ratios. (Today’s is the 19th.) The average one-year gain on my selections has been 33.7 percent, compared with 10.1 percent for the Standard & Poor’s 500 Index.

If you’re a knowledgeable investor, you are probably doubting my word right now. My performance is due in substantial part to returns of 177 percent, 99 percent and 69 percent from 2000 through mid-2003.Value investing was having a heyday then. Of the 18 columns, 16 have been profitable and 11 have beaten the index.

Last year’s column did not beat the index, which was up almost 41 percent. But it did notch a 32 percent gain, led by Raytheon Technologies Corp. (RTX), which returned 49 percent. The worst performer was Sprouts Farmers Market Inc. (SFM), up 9.2 percent.

Netgear

Now it’s time for some new picks among stocks selling for less than 1.0 times sales — often substantially less.

I’ll start with Netgear Inc. (NTGR). Based in San Jose, California, the company provides telephone and computer networking for homes and small or medium-sized businesses.

Netgear’s debt is low, only 5 percent of the company’s net worth. It has been profitable in 14 of the past 15 years, but profits are rarely outstanding. That’s why the price-tosales ratio is only 0.88.

AutoNation

Investors know that car sales are cyclical. So perhaps it’s not surprising that AutoNation Inc. (AN), which runs 230 car dealerships, sells for only 0.43 times sales.

I think it deserves better. AutoNation has been profitable in 14 of the past 15 years. Return on invested capital exceeded 15 percent in the latest quarter, the best the company has done in a long time.

Meanwhile, the dealership chain has pared down to 65 percent of stockholders’ equity, the lowest it’s been since 2010.

MYR Group

Based in Rolling Meadows, Illinois, MYR Group Inc. (MYRG) provides electric construction services. It engineers wiring systems for municipal lighting systems, factories, and power grids.

One thing I like about this company is its strong balance sheet, with debt only 11 percent of stockholders’ equity. The stock sells for 0.66 times sales, which is more expensive than its 10- year average, but still in bargain territory.

Tutor Perini Corp.

One of the cheapest stocks, judging by the price-to-sales ratio, is Tutor Perini Corp. (TPC), a small engineering and construction company. One of its specialties is building casinos. The stock goes for a mere 0.13 timessales.

With an infrastructure bill likely to pass Congress, I think engineering and construction companies are likely to do well in the next two to three years.

Bear in mind that my column results are hypothetical: They don’t reflect actual trades, trading costs or taxes.