One of the most successful investors in the world, Kenneth Fisher highlighted the use of the price-to-sales ratio as a quick and easy metric to find potentially undervalued companies. He reasoned that,
“any stock with a low price relative to its previous 12-month sales would rise if its future earnings became large enough to translate into a low future PE”
In other words, investors would eventually see this undervalued stock was posting strong revenues and had the potential for excellent future profit margins once the downturn or crisis passed (see the full interview with Ken Fisher here).
Finding a company with a low price-to-sales ratio is easy. The tricky part is to find one which has future earnings large enough to translate into a low PE. Rather than try and predict the future, we prefer to build strategies which have a better likelihood of out-performing based on market history. We accept that many companies we invest in will not work out, but instead look to invest in a strategy which through the sum of it’s parts out-performs as a whole.
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