Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell

Chapter 7. Value Selection

The method I use to value each stock is the price-to-sales ratio. This ratio is simply the ratio between the stock’s weekly closing price and the last four quarters of reported sales for the company. The sales first are divided by the number of shares outstanding to create the price-per-sales per share. In the tests, I calculated this ratio for every stock for every week over the period 1998 through 2006. All stocks were sorted by their price-to-sales ratio; then they were ranked in percentiles based on 99 being the highest price-to-sales ratio to zero, the lowest. Each stock’s relative price performance percentile was then recorded for the following 3-, 6-, and 12-month periods. This way I knew for any relative price-to-sales ...