No. of Recommendations: 1
Two points concerning PSR (price-to-sales ratio) and REITS and stocks in general.


There used to be an old rule of thumb, that a property should rent every month for 1% of the property's value. While that may be both from a time in the past and be a gross simplification even them, its gives me a good starting point.

If the monthly rents equal 1% of value that would be a PSR of .12 for the individual property, a pretty low ratio. Of course if you leverage the properties then that .12 could double, triple, or more, but without more leverage than I would like to see in any REIT you are not going to get near a PSR of 1 or greater.

Of course you can argue that certain intangibles, such as management or customers, could make a REIT worth more than the value of its properties minus liabilities, but not by that much in my opinion.

I've been investing in REITs for 20 years and they have always relatively low PSR's as you would expect of a capital intensive business with long asset life and high profit margins. In the simplest term, would pay more than 1 times value for anything that they rented that would last decades, they would buy!

Stocks in General

I have not found PSR to be a terribly useful indicator of values. If you screen stocks with PSR as one of your criteria, you will get a lot of companies with low profit margins such as grocers, wholesalers, etc.,.

I have used PSR to search in downtrodden industries under the theory that when the industry turned around profit margins would grow and the stocks with a high PSR would benefit the most. In the end however, I have often found companies with more capacity, reserves (energy), etc., to be better than just a low PSR.
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