3 Stocks With Insanely Low P/S Ratios That Hedge Funds Are Bullish On

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.

Resolute Forest Products Inc (NYSE:RFP)

17 hedge funds in our system owned Resolute Forest Products at the end of 2017, up from 13 at the end of last September. Those funds owned nearly half of the company’s shares, 46.4% to be precise, with the bulk of that amount being held by Prem Watsa’s Fairfax Financial.

The Canadian company, which has a P/S of 0.25 and a forward P/E of just 6.68, has declined by over 10% in 2018. Shares were crushed at the beginning of February when the company revealed that a shortage of truck drivers was negatively impacting the delivery of materials from its sawmills to its paper mills and increasing costs. Canada could have a truck driver shortfall of nearly 50,000 by the middle of the 2020’s according to the Canadian Trucking Alliance, as young workers steer clear of an industry that is expected to eventually be wiped out by self-driving vehicles.

Resolute Forest Products Inc (NYSE:RFP) has also been caught in the crosshairs of the seemingly endless softwood lumber battle between the U.S and Canada. The U.S Commerce Department imposed preliminary duties of up to 22.16% on uncoated groundwood paper from Canada in March.

Rayonier Advanced Materials Inc (NYSE:RYAM)

25 hedge funds in our system were shareholders of Rayonier Advanced Materials Inc (NYSE:RYAM) at the end of 2017, owning 22.1% of the company’s float. Among them was activist hedge fund Marcato Capital, helmed by Mick McGuire. McGuire more than tripled his fund’s stake in the stock during the fourth-quarter of 2017 to 1.55 million shares, which was appropriate given that at the 13D Monitor Active-Passive Investor Summit in April he stated that the stock could likewise triple in value.

Rayonier Advanced Materials Inc (NYSE:RYAM), which has a P/S of 0.66 and a trailing P/E of 2.90, completed its purchase of Tembec towards the end of 2017, which is expected to double the company’s revenue in 2018 after five years of declines. Rayonier expects to generate $155 million in EBITDA growth over the next three years thanks to the acquisition.

Disclosure: None