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Dorfman: Price/sales ratio throws light on worthwhile stocks

| Monday, July 17, 2017, 11:00 p.m.

How can you tell if a stock is a bargain? One test is the price/sales ratio — a stock's price divided by the company's sales per share.

Take Coca-Cola Co. It has roughly 4.2 billion shares of stock outstanding. Its annual revenue is about $42 billion. So, it has roughly $10 of revenue per share (actually, $9.70 because I rounded off the figures). Divide Coke's stock price of $44.68 by $9.70, and you get a ratio of 4.7.

That ratio is above average because Coca-Cola is a highly regarded stock. The average today is about 3.8. Historically, a normal average is between 1.5 and 2.0. Today's market is pricey.

But the stocks I want to talk about today aren't pricey. They sell for 1.0 times revenue or less and might be bargains.

Track record

From 2000 through 2016, I've written 14 columns recommending stocks with low price/sales ratios.

The average 12-month gain has been 38.5 percent, compared to 7.8 percent for the Standard & Poor's 500 Index. That's better than I usually do, in this column or in actual investing. The high return owes a lot to fortunate choices I made in 2000, 2002 and 2012.

My low price/sales picks have been profitable 13 times out of 14, and beaten the S&P 500 nine times.

Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.

Last year's picks managed a 19.8 percent average gain, edging out the index at 16 percent. My best choice was Aetna Inc., which returned 38.4 percent. Worst was Potbelly Corp., down 5.6 percent.

Here are five stocks that look attractive to me now, based on the price/sales ratio and on other attributes.

CVS Health

CVS Health Corp. is, in my judgment, the most successful of the major drugstore chains. Its stock sells for 0.5 times revenue, in line with its own past multiples. Yet the company has grown its sales at a 12 percent clip the past decade, and that accelerated to 17 percent last year.

Drugstores depend on their prescription business to lure customers to pass through their retail aisles. If prescriptions start being filled mostly via the internet, there goes their edge. That's a risk, but I don't think it's imminent.

Valero

Peter Lynch, a famed money manager, used the term “ten bagger” for a stock that increases to 10 times its initial value. Valero Energy Corp. (VLO) was better than a ten bagger from 1999 through 2015, rising from under $5 to $70. It has eased off since, trading now at $68 to $69.

Valero is the largest independent refinery in the United States. A gasoline glut depressed refining shares last year and this year. But inventories seem to be normalizing now. At 14 times earnings and 0.4 times sales, I think Valero is attractively priced. It also offers a dividend yield of better than 4 percent.

America's Car-Mart

Sales of cars have slowed down, but I still think shares of America's Car-Mart Inc. (CRMT) might be a bargain. The shares go for about $37, which is 0.6 times revenue. They have bounced around between $25 and $50 in recent years.

Selling cars mainly in the rural South, the company provides credit to almost all its buyers, and many of its buyers have bad credit. But it prices its car loans accordingly, and has been profitable in every one of the past 15 years, a claim not many companies can make.

Omega Protein

A little stock I like is Omega Protein Corp. (OME) of Houston. It produces fish meal, used mostly for animal feed, and fish oil, often used in nutritional supplements. Many of its products are made from menhaden, a fish that isn't sold for human food.

I particularly like Omega's balance sheet, with debt less than 1 percent of stockholders' equity. Profitability is decent but not great, and profits are down in 2017. At 0.9 times sales and 8 times earnings, though, I think the benefits outweigh the risks.

Met Life

I've predicted for a long time that interest rates would rise, and I was premature. However, I believe they are beginning to rise now, which will probably benefit insurance companies (because they often invest premium money into fixed-income securities).

One possible beneficiary is MetLife Inc. (MET) of New York. Its shares go for 1.0 times revenue, 12 times earnings, and 0.9 times book value (corporate net worth per share).

Disclosure: I own Omega Protein for one client and MetLife for a couple of clients.

John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. Reach him at jdorfman@dorfmanvalue.com.

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