Ken Fisher is a famed investor, and the son of investing icon Philip Fisher. Through his best selling book Super Stocks and his track record at his firm, Fisher Investments, Fisher has established himself as a growth stock authority.
In his aforementioned book Super Stocks, Mr. Fisher introduced the investing world to a new valuation metric, the price-to-sales ratio. Since the days of Ben Graham investors had happily measured price against earnings, but never sales.
With that kind of performance, you have to believe that price-to-sales is a good way to find quality stocks. Here are a few that meet Fisher’s criteria of a low p/s ratio and also seem to have good prospects overall.
Treading profits
Since 2009 auto sales have led the U.S. recovery. Auto sales have been the largest percentage of U.S. GDP over the past five years, and Cooper Tire & Rubber Co (NYSE:CTB) has been a chief beneficiary.
So while the stock currently trades at a multi-year high, it still trades at a remarkably low price-to-sales ratio of just 0.52. If the idea is to invest in companies that trade at a cheap valuation compared to trailing twelve month sales, with the stock market average being 2.1, a valuation at 0.52 of sales is remarkably low.
Cooper Tire & Rubber Co (NYSE:CTB) is coming off of a remarkable earnings beat of 33% and is trading at a price-to-earnings growth ratio of just 1.14, so it seems like those revenues are hitting the bottom-line well.
U.S. auto sales met most lofty projections last year, and they’re expected to rise again throughout 2013. With rising gas prices and new improved fuel efficiency standards coming from the White House, I think auto sales could be moving upward for a while. Cooper Tire & Rubber Co (NYSE:CTB) could make sense here. Ford Motor Company (NYSE:F) could be in a growth position for many of the same reasons, after all someone will need to make these new, more fuel efficient vehicles. U.S. auto sales, however, aren’t exactly Ford Motor Company (NYSE:F)’s biggest concern.
The auto maker has been gaining market share in its already industry-leading U.S. truck division. Production has picked up significantly for its F-150, the best selling truck in the U.S.
So the real question for Ford Motor Company (NYSE:F) is the struggling European market.
Alan Mulally, Ford Motor Company (NYSE:F)’s CEO, has been reassuring investors for some time that he has a “comeback plan” for Europe. After second quarter earnings blew past expectations, with 52% EPS growth coming from dramatic improvement in Europe, investors seem more inclined to believe Mulally.
The stock is trading at a fresh 52-week high but still ranks well on Fisher’s scale, with a price-to-sales ratio of just 0.47. I look at Ford Motor Company (NYSE:F) and see a company with a PEG ratio of just 0.97, a catalyst in a stabilizing Europe, and another catalyst in higher fuel efficiency standards. Over time, the attractive p/s ratio could just be the start of many catalysts that drive Ford Motor Company (NYSE:F) higher.
View the big picture
National-Oilwell Varco, Inc. (NYSE:NOV) checks in with a better than average p/s ratio of just 1.45, below the market average. It looks cheap based on price-to-sales, but it isn’t as highly ranked as a company like Manitowoc Company, Inc.(NYSE:MTW) (with a p/s of just 0.64).
When you look at these two companies, they have a lot in common. Both businesses make industrial equipment, National-Oilwell Varco, Inc. (NYSE:NOV) in the oil industry and Manitowoc Company, Inc.(NYSE:MTW) in construction. Yet, while both have attractive price-to-sales numbers, the rest of Manitowoc’s picture isn’t quite as pretty.
Manitowoc Company, Inc.(NYSE:MTW)’s revenue is lighter now than it was five years ago, National-Oilwell Varco, Inc. (NYSE:NOV)’s is much higher. While Manitowoc Company, Inc.(NYSE:MTW) is doing some things well, revenue growth hasn’t been overly impressive. Comparatively National-Oilwell Varco, Inc. (NYSE:NOV) has grown sales 15% annually over the past five years.
That top-line growth has helped National-Oilwell Varco, Inc. (NYSE:NOV) grow its cash hoard in recent years, while Manitowoc Company, Inc.(NYSE:MTW)’s cash on hand has declined over 50% since 2008.
So as I look at these two equipment makers, I see two “low p/s” stocks, but one that looks much more attractive when the big picture is considered.
Price-to-sales: an intriguing starting point
If you look at Ken Fisher’s track record, it’s hard to argue that the p/s ratio is a great starting point for stock picking. It may also be more relevant right now than ever, because so many companies seem to be growing EPS through cost cutting (even as sales stay flat).
That said, like all metrics, Ken Fisher’s “screener” is just a starting point. Make sure to evaluate a company’s cash and growth prospects before buying–just like we did with these three stocks.
Adem Tahiri owns shares of National Oilwell Varco. The Motley Fool recommends Ford and National Oilwell Varco. The Motley Fool owns shares of Ford and National Oilwell Varco. Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Invest Like Ken Fisher With These 3 Stocks originally appeared on Fool.com is written by Adem Tahiri.
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