Tech Data, Valero Stand Out on This Ratio
Posted: July 14, 2015
There are dozens of ways a company can manipulate reported earnings, many of them legal. However, there are relatively few ways a company can manipulate its sales, also known as revenue.
That’s one reason why in evaluating a stock, it pays not to focus solely on the price/earnings ratio, which is familiar to most investors. One should also look at the price/sales ratio, which is less talked about.
What is the price/sales ratio? It is simply a stock’s price divided by the company’s revenue per share. The average stock currently sells for 1.8 times revenue. I often buy stocks with a ratio of 1.0 or less, and rarely buy stocks on which the ratio exceeds 2.0.
Past Success
Twelve times, beginning in 1998, I’ve written columns recommending some stocks with low price/sales ratios. The average return has been 43.8 percent, which compares to 7.4 percent for the Standard & Poor’s 500 Index in those dozen one-year periods.
I’m aware that 43.8 percent is an inflammatory number that may provoke skepticism. The high return is in large part the result of three great years in 2000-2002, in which my selections were up from 69 percent to 177 percent.
All 12 lists have been profitable, and eight of the 12 lists have beaten the S&P 500.
Last year’s recommendations gained 25.5 percent, about triple the S&P’s return from July 15, 2014 through July 10, 2015. Travel Centers of America LLC (TA) was the best gainer, up more than 77 percent. Staples Inc. (SPLS) was next best, with a 42 percent return. And Valero Energy Corp. (VLO) chipped in 34 percent.
Visteon Corp. (VC), an auto-parts maker, trailed the index with a 3 percent return. The lone loser was Sanderson Farms Inc. (SAFM), down nearly 30 percent. I currently own Sanderson personally and for clients, although I did not yet own it last July.
Please bear in mind that past performance is no guarantee of future results. The figures for my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. The results of my column picks shouldn’t be confused with the performance I achieve for clients.
Now for some new picks.
Tech Data
Tech Data Corp. (TECD), based in Clearwater, Fla., distributes computer hardware and software. It has thin profit margins (like most distributors) and has struggled to show consistent growth. And it is unpopular on Wall Street: Of eight analysts who follow it, only one recommends it.
I think the cheap stock price compensates for all that. The stock sells for 0.07 times sales, 10 times earnings and 1.05 times book value (corporate net worth per share). Analysts have been raising their earnings estimates lately.
The Andersons
I own The Andersons Inc. (ANDE) personally and for clients, and so far have been taking a beating in the stock. The company, out of Maumee, Ohio, operates grain elevators; purchases, stores and sells ethanol, leases rail cars and repairs locomotives.
Weak crop prices and a surplus of ethanol are the company’s biggest problems. I see these problems as real but temporary. I like the company’s business mix, and I adore its valuations — 0.24 times sales and 12 times earnings.
Travel Centers
I still like Travel Centers of America, which still fetches 0.08 times sales, even after its big gain in the past 12 months. The company operates rest stops along interstate highways. It owns the Iron Skillet and Country Pride chains, and operates franchises of Burger King, Popeye’s Chicken, Starbucks and several other restaurants.
Travel Centers caters to truckers, offering diesel fuel, truck repairs, roadside service, exercise rooms with showers and other services. Truck traffic is economically sensitive. I believe the underlying trend in the U.S. economy is up, and that it will not be derailed by events in Greece, China or the Middle East.
Valero
I also continue to recommend refiner Valero Energy Corp. (VLO). I like the refiners in general, because they can get their main raw material fairly cheaply if oil prices stay in the $50 to $70 range (my prediction for the coming year or two).
Valero sold for 0.2 times revenue when I recommended it last year; today its price/sales multiple is 0.3.
Lear
Lear Corp. (LEA), which goes for 0.45 times sales, is a stock I own personally and for clients. The company, based in Southfield, Mich., makes electrical systems and seats for cars. Ford, General Motors and BMW are its three biggest customers, but it claims to serve every major car manufacturer in the world.
I am a little worried about car sales in Europe and China, but very optimistic about sales in the United States. And there is room for pleasant surprises if Europe or China perk up.