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Price/Sales Ratio Valuation Metric

• The Price-to-Sales (P/S) Ratio is a valuation metric that compares a company’s stock price to its revenue per share. It is calculated as market capitalization divided by total sales over the past 12 months. 

• A lower P/S ratio suggests a stock may be undervalued, as investors pay less for each dollar of revenue.

• P/S Ratio must be considered alongside other factors like debt, profitability, and industry norms.

• S&P 500 P/S ratio at 2.84 in January 2025, with P/S ratios of 1–2 considered “good” and below 1 “exceptional.” 

• Commodities sectors (e.g., energy, metals) often have lower P/S ratios due to low margins and cyclical revenues

• When evaluating P/S of individual companies, they should be compared to their industry average P/S.

• In deciding whether a company with a low P/S is a “value gem” or a “value trap,” one must gauge whether the company has temporary issues and stable long-term business prospects or some long-term structural problems.

Commodities Companies with the Lowest P/S – Part 1

• World Bank projects a 5% decline in commodity prices in 2025, with energy (-6%) and metals (-3% by 2026) facing downward pressure. Reduced revenues could potentially lower P/S ratios for related firms.

• Below is a sample list of some energy and mining companies with low P/S Ratios, as a starting point for your research.  We will look at their cycles in the Free and Pro newsletters this week (SGML was already analyzed in Sunday’s Pro newsletter)

• Peabody Energy (BTU) – Coal Mining, Sector: Energy (Coal)

• P/S Ratio: Approximately 0.5 (as of August 2024, per Yahoo Finance).

• Why Low P/S? Coal prices have been depressed due to oversupply and reduced demand (World Bank), lowering revenues relative to the market cap. Peabody’s focus on thermal and metallurgical coal makes it sensitive to commodity cycles.

• However, high debt and environmental regulations pose risks.

• Precision Drilling (PDS) – Oilfield Services, Sector: Energy (Oil & Gas Services)

• P/S Ratio: Approximately 0.7 (August 2024, per Yahoo Finance).

• Why Low P/S? Oil prices are projected to decline in 2025 (Brent crude at $75/bbl), and oilfield services face reduced demand amid ample non-OPEC supply. This compresses revenues, lowering P/S ratios.

• PDS provides drilling rigs, benefiting from North American oil activity but hurt by crude price volatility. Energy sector weakness aligns with broader commodity price declines.

  • Sigma Lithium (SGML) – Lithium Mining, Sector: Metals & Mining (Lithium)

  • P/S Ratio: Approximately 1.8 (October 2024, per GuruFocus, adjusted for 2023 revenue from Xuxa).

  • Why Low P/S? Lithium prices have dropped 80% since 2023, reducing Sigma’s revenue from the Xuxa project (220,000 tons annually). Despite this, Sigma’s market cap remains moderate due to growth expectations, yielding a relatively low P/S ratio for a lithium miner.

  • Xuxa’s significance lies in its 13.79 Mt reserves and green credentials, but lithium oversupply risks depress revenues, lowering P/S ratios for lithium firms.

Sentiment & Technical Analysis

• The CNN’s Fear & Greed Index is gradually drifting away from Extreme Greed( >=75)

• Mergers and Acquisitions are at the lowest level since 2005.

• What is the reason?

• Are there no good deals or a lack of business visibility?

BraVoCycles on X

• Consider following me on X (former Twitter) in addition to the newsletter, as I often post valuable information there in real time between the newsletters.

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