Your Next Great Stock: How to Screen the Market for Tomorrow's Top Performers

Chapter 21. The Sales on Sale Screen

Sometimes two or more measures of a stock's value disagree on whether it's cheap. A stock's price/earnings ratio might say it is a bargain, while its price/cash flow ratio says the opposite.

The same goes for measures like price/free-cash-flow, price/book value, price/sales, EV/EBITDA, and others we looked at in Chapter 10.

That raises the question of which one is right most often. If the measures sometimes disagree, after all, some must be better than others at predicting stock gains.

Two of the measures, in fact, stand out as having an astounding record of beating the market when mixed in with the right supporting clues. Neither gets nearly as much attention as the P/E ratio, despite ample evidence that shows they produce better results. They're the price/sales ratio and the price/book-value ratio. We'll look at a strategy based on the first one in this chapter and one based on the second one in Chapter 22.

Sales might seem like an unlikely candidate for a powerful predictor of stock gains. They appear at the top of a company's income statement. That means they say nothing about whether the company is profitable. A company might be selling plenty of goods and services but at prices that don't exceed its costs. And because sales are on the income statement, they don't tell you whether a company is producing cash, either. A company might be writing up plenty of product orders but not collecting the payments.

Yet sales have a few advantages over more ...