Watching The Market's Price To Sales Ratio

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 |  Includes: AVT, BGFV
by: Bret Jensen

Summary

One of the concerning stats of the current market is the extreme price to sales ratios that exist in the S&P 500 compared to historical norms.

A contrarian way to counteract this sign of overvaluation is to find stocks with low price to sales ratios that seem undervalued in the market.

Here are two relatively underfollowed equities that have very low price to sales ratios and should reward long term investors.

There was an interesting stat within an article in Barron's this weekend. Since 1976, the S&P 500 has traded at average price to sales ratio of .9. This ratio currently stands at 1.6, an extreme deviation from the norm. This is a testament to these companies who have been able to enable earnings growth via cost cuts, stock buybacks and acquisitions even as global demand continues come in under historical norms.

However, with S&P 500 margins at or near record highs; how long these gains can continue with organic growth remaining so tepid in unclear. This to me it is one of the biggest signs the current market is at least slightly overvalued. It is also a metric I do not see being discussed much in the financial press.

One contrarian way I have found that can counteract this risk is to look at stocks that have low price to sales ratios and either are temporarily under pressure or are just undervalued by the market given their current performance. Here are a couple of these sorts of low price to sales equities that do look attractive even in an overvalued market.

I have been slowly accumulating the shares of Big 5 Sporting Goods (NASDAQ:BGFV) over the past few weeks. The equity has had a horrid 2014, down almost 50% from where it started the year. The stock is now priced at just a quarter of annual revenues and at a huge discount using this metric to competitors Dick's Sporting Goods (DICK) and Hibbett Sports (NASDAQ:HIBB).

The main driver of Big 5's sell-off have been a couple of disappointing earnings reports and declining same-store sales. The fall in same store revenue has been primarily the result of gun and ammo sales plummeting which has affected all retailers that sell these goods. These sales have plunged more than 40% from last year, when they were bolstered substantially by fears of new gun control legislation as the result of the Newtown massacre. Those hard same store comparisons should no longer factor in the quarters ahead as we are a year from that bump now.

However, despite the fall in same store sales, the company is still solidly profitable. The shares go for eight times trailing earnings and also pay an almost four percent dividend yield as well which should help put a floor under the stock. I believe the shares will richly reward long term value investors once the harshly negative sentiment on sporting goods retailers starts to lift a bit.

Avnet (NYSE:AVT) goes for just 20% of annual revenues. Avnet is one of the largest global distributors of electronic components, enterprise computer and storage products which is about as unsexy a space as exists in the market. It must be more attractive to insiders as a director made a huge buy of almost $8 million of stock last week.

The shares have a lot of value at current levels. The company is consistently is growing earnings in 8% to 10% annual range on back of a yearly 3% to 4% increase in sales. Despite this, Avnet is selling for around nine times forward earnings; an approximate 40% discount to the overall market. The stock also yields 1.4% after recently bumping up its payout. The stock also has a five year projected PEG of under 1 (.87), a sign the market is undervaluing its growth prospects.

Disclosure: The author is long BGFV.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.