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Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand on the more commonly used P/E ratio as it facilitates comparison of stocks with fixed income securities. Interestingly, it is simply the inverse of the P/E ratio.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater returns.
Earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
However, bearing in mind the risk-free nature of T-bills, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the stock market.
The Winning Strategy
We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for selecting stocks that have the potential to generate solid returns. So, we have added the following parameters to the screen:
Estimated EPS growth for the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month forward EPS Estimate with the 12-month Actual EPS.
Average Daily Volume (20 Day) greater than or equal to 100,000: High trading volume implies that a stock has adequate liquidity.
Current Price greater than or equal to $5.00.
Buy Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally outperform their peers in any type of market environment.
Here are four of the seven stocks that made it through the screen:
Korea Electric Power Corp. (KEP - Free Report) is an integrated electric utility engaged in the generation, transmission, distribution of electricity and development of electric power resources in South Korea. This Zacks Rank #2 stock has an expected EPS growth rate of 25% for the next 3–5 years.
Third Point Reinsurance Ltd. is a property and casualty reinsurance company based in Bermuda. The company carries a Zacks Rank #1. Its expected EPS growth rate for 3–5 years is 15%.
Mylan N.V. is a global pharmaceutical company with a well-established generics business as well as a presence in specialty pharmaceuticals. The company carries a Zacks Rank #2 and its expected EPS growth rate for the next 3–5 years is 10.41%.
Gray Television, Inc. (GTN - Free Report) is a communications company headquartered in Atlanta, GA, and currently operates 15 CBS-affiliated television stations, seven NBC-affiliated television stations, seven ABC-affiliated television stations and four daily newspapers. This Zacks Rank #2 company has an expected EPS growth rate of 6.5% for the next 3–5 years.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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4 Buy-Rated Stocks with High Earnings Yield
Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand on the more commonly used P/E ratio as it facilitates comparison of stocks with fixed income securities. Interestingly, it is simply the inverse of the P/E ratio.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater returns.
Earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
However, bearing in mind the risk-free nature of T-bills, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the stock market.
The Winning Strategy
We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for selecting stocks that have the potential to generate solid returns. So, we have added the following parameters to the screen:
Estimated EPS growth for the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month forward EPS Estimate with the 12-month Actual EPS.
Average Daily Volume (20 Day) greater than or equal to 100,000: High trading volume implies that a stock has adequate liquidity.
Current Price greater than or equal to $5.00.
Buy Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) generally outperform their peers in any type of market environment.
Here are four of the seven stocks that made it through the screen:
Korea Electric Power Corp. (KEP - Free Report) is an integrated electric utility engaged in the generation, transmission, distribution of electricity and development of electric power resources in South Korea. This Zacks Rank #2 stock has an expected EPS growth rate of 25% for the next 3–5 years.
Third Point Reinsurance Ltd. is a property and casualty reinsurance company based in Bermuda. The company carries a Zacks Rank #1. Its expected EPS growth rate for 3–5 years is 15%.
Mylan N.V. is a global pharmaceutical company with a well-established generics business as well as a presence in specialty pharmaceuticals. The company carries a Zacks Rank #2 and its expected EPS growth rate for the next 3–5 years is 10.41%.
Gray Television, Inc. (GTN - Free Report) is a communications company headquartered in Atlanta, GA, and currently operates 15 CBS-affiliated television stations, seven NBC-affiliated television stations, seven ABC-affiliated television stations and four daily newspapers. This Zacks Rank #2 company has an expected EPS growth rate of 6.5% for the next 3–5 years.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »