Taken individually, the price-to-sales and price-to-earnings ratios of companies are useful measures for determining their relative valuation, particularly in comparison to other companies in their industries. Taken together, they provide an even more complete picture of how the market is valuing a company in relation to its end results.
Naturally, a host of other factors are important considerations when attempting to judge the financial health and fair valuations of companies, including their growth rates and debt levels. And to be sure, companies with both low P/S and P/E ratios tend to be experiencing problems in other areas, including the aforementioned issues. The challenge then is to determine whether the market has gone too far in battering these stocks or whether the massive valuation discounts are justified.
In this article we’ll take a look at three stocks with miniscule P/S ratios which the hedge funds tracked by Insider Monkey are also overweight to see if their discounts are egregious or fair.
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Habit Restaurants Inc (NASDAQ:HABT)
Habit Restaurants Inc (NASDAQ:HABT) is one of several so-called better-burger fast-casual chains that have gone public in recent years, hitting the market in late-2014. In contrast to fellow burger joint Shake Shack Inc (NYSE:SHAK), which has beaten shorts into the ground, Habit Restaurants has done nothing but fall since its IPO. In contrast to Shake Shack’s P/S of 6.56, Habit’s stands at just 0.79 despite double-digit revenue growth for the past several years.
While Habit’s operating income and same-store sales have stalled amid the growing competition, shares certainly appear to be undervalued given the continued revenue growth expected from the company. 16 hedge funds that we track were long Habit Restaurants at the end of 2017, a 33% increase from the end of last September. Those 16 funds owned 18.1% of Habit’s shares.
On the next page we’ll look at two other stocks that have a lot of hedge fund support in addition to miniscule P/S and P/E ratios.