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While gambling machines won't be in place for Belmont attendees this weekend, word has it they're on the way to racetracks all over New York state. Several other states, too, are having deficit-induced changes of heart toward legalized gambling. One company that survived this week's stock screen stands to cash in big in Pennsylvania — yet a recent shellacking it took in Illinois has its shares trading at only 0.8 times sales.

But wait...sales? Shouldn't we be concentrating on the stock's price/earnings ratio instead? Not necessarily. Sure, the P/E ratio is as familiar as franks and beans. But savvy investors also like to sample a stock's price/sales ratio.

See, sales are the first item on a corporate income statement. Next come all the deductions — things like day-to-day operating expenses, adjustments for plant purchases, interest, taxes and so on — that accountants whittle off of the top-line sales figure. And each step brings a new opportunity for accounting, um, creativity. Ever notice how some companies always manage to beat Wall Street's earnings expectations by a penny a share — even when their sales falter. It's no coincidence. After the scandals of the last few years, it's safe to say that accounting is equal parts art and science. So while profits are clearly important, it's also wise to watch the least malleable number on the income statement — sales.

Indeed, research suggests that sales might very well be a better predictor of stock performance than earnings. James O'Shaughnessy, author of the best-selling investing guide "What Works on Wall Street," uses 43 years' worth of data to demonstrate that stocks with low P/S ratios outperform those with low P/Es. And stocks with low P/S ratios and positive sales momentum outperformed the broader market 77% of the time, gaining 18.4% annually over the 43-year period, compared with 13% for the market.

With that in mind, we used our stock screening tool to search our database of 8,300 companies for those with low price/sales ratios (less than 1.0). And since low-margin industries like retailing have chronically low P/S ratios, we made sure that all of our survivors were also below their industry averages. We also looked at things like positive net margins, historical sales growth and earnings projections, all of which you can see on our recipe to the right. We ended up with a list of 17 names.

Penn National Gaming
Based in Wyomissing, Pa., Penn National Gaming (PENN) owns two racetracks and 11 off-track betting facilities in Pennsylvania, and nine other gaming properties, including Boomtown Biloxi in Mississippi, the Casino Rouge riverboat in Louisiana and Bullwhackers in Colorado. Revenues last year totaled $657 million, and yielded close to $30 million in profits.

A look at the stock's chart shows shares folding in May, falling from a high of $23.60 to just over $16. Penn's luck soured when Illinois legislators put on their taxing shoes and began targeting gambling outfits, among them Penn's Hollywood Casino in Aurora. This past weekend the changes were finalized: Admission fees are now $5, up from $3, and all revenue over $25 million will be subject to higher taxes, with the highest rate now 70% for revenue over $200 million, up from 50% for revenue over $250 million.

Penn will host a conference call on June 10 to discuss the potential impact of the tax hike, but analysts have already slashed estimates: C. L. King's Ryan Worst dropped his 2003 projection to $1.13 from $1.35, while Lehman Brothers' Joyce Minor cut hers to $1.14 from $1.34.

But Penn's luck might be about to change.

"We are encouraged by comments this weekend from the [Pennsylvania] Senate Democratic leadership that they believe that there are enough votes to pass a slot bill," wrote Worst on Monday. "We view the current weakness in PENN shares relating to Illinois as a buying opportunity given . . . strong fundamentals in other markets . . . and potential for slots at its racetracks in Pennsylvania."

Worst says the passage of a slot bill could add $6 or $8 to PENN shares, based on a forward EV/Ebitda multiple (enterprise value, which is market cap plus debt minus cash, divided by earnings before interest, taxes, depreciation and amortization) of 6.5, about where the stock trades now. (Worst doesn't own shares of PENN; C. L. King doesn't have an investment-banking relationship with the company.)

Not all analysts have adjusted their estimates yet, so you can ignore PENN's 2003 P/E of 10.5. If we assume the consensus will drop to $1.13 (from $1.35 last month), that puts shares at a 2003 P/E of around 14.2, compared with 16.9, on average, for peers, according to Zack's Research. That's a considerable discount to the company's five-year earnings growth projection of more than 18% annually. The stock looks cheap to us, and that's not counting the possibility of an upcoming slots jackpot.

L-3 Communications
Defense contractors are often headquartered in Bethesda, Md. (Raytheon (RTN)), Falls Church, Va. (General Dynamics (GD)) or somewhere else within an hour's drive of the Pentagon. But L-3 Communications (LLL) does business out of Third Avenue in Manhattan. Perhaps management feels more comfortable being close to the New York Stock Exchange, where L-3 shares have gained more than 200% during the past five years.

Despite the stock's 25% pullback over the last 52 weeks, L-3's profits still look strong. The company's first-quarter results, reported April 22, show sales, operating income, earnings per share and free cash flow rising 56.3%, 52.6%, 38.9% and 189.7%, respectively, from year-prior figures.

Most of the sales gains have come from acquisitions, although the company did manage to increase its organic sales by about 10% year-over-year. Unfortunately, the buying spree has been accompanied by a borrowing spree: The company's debt/equity ratio has ballooned to around 0.8. We usually like to stick with stocks boasting debt/equity ratios below 0.5.

But keep in mind that the faster a company increases its earnings, the more worthwhile it is to borrow funds to continue that growth. L-3's five-year annual earnings growth projection is more than 16%, almost double peers' average of 8.7%. And a recent large bond refinancing that took interest payments to 6.13% from 8.5% will improve future cash flows.

Note that one company on our list, Express Scripts (ESRX), was featured in our March 21 rising expectations screen. Shares are up 18.2% since then, compared with 12.2% for the Standard and Poor's 500.