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Low Price/Sales
Like the YPEG Potential, the Low Price/Sales ratio screen is a Value screen
one can use with Growth stock strategies. The Price/Sales ratio (PSR) has
recently been popularized by James O'Shaughnessy's research in What Works
on Wall Street.
The Price/Sales ratio may be a more accurate measure of the market's value
for a stock because unlike the earnings portion of a P/E ratio, the Sales
portion of the Price/Sales ratio isn't easily fudged in the accounting
department.
By itself, the PSR may not be a fabulous screen (although it does work well
over longer holding periods) simply because some industries typically sport
lower PSRs than others. But when combined with a growth screen like high
Relative Strength, O'Shaughnessy found it to be a crucial factor in one-year
holding periods.
The screen we're following is a pure PSR ranking, so don't be surprised if
among the winners there are some weak performers. That doesn't mean the approach
isn't any good. It just means that you may consider using it as one screen
along with others.
Instructions to generate current rankings:
1. Start with the list of 100 Timely Stocks from page 27 of the Value Line
Investment Survey (excluding any stocks on foreign exchanges.
2. Look up the Price/Sales ratio (from a source like Morningstar Equities
online) and rank the stocks in ascending order.
3. Select the five stocks with the lowest ratios, breaking any ties using
the Relative Strength ranking.
4. Update the first Friday of each month. (We're tracking this screen for
a quarterly, semi-annual, and annual holding period as well.)
There is no back-tested history for this screen yet.
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