Earnings yield is useful for investors who are concerned about the rate of return on an investment. This metric, expressed in percentage, is calculated as annual earnings per share divided by market price — the inverse of the price-to-earnings (P/E) ratio.
While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is not as widely used as P/E ratio as a valuation metric but investors most commonly compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a stock is lower than the 10-year Treasury yield, the stock would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued.
We have set Earnings Yield greater than 10% as our primary screening criterion but it alone cannot be used for picking stocks that have the potential of generating 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. Buy-Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have been known to outperform peers in any type of market environment. You can see . the complete list of today’s Zacks #1 Rank stocks here Our Choices
Below we have highlighted five of the 47 stocks that made it through the screen.
The ODP Corporation ( ODP Quick Quote ODP - Free Report) : Based in Boca Raton, FL, this company provides business services and supplies, products, as well as technology solutions. It sports a Zacks Rank #1. The company has an expected EPS growth rate of 6.8% for the next three-five years. The Zacks Consensus Estimate for 2020 and 2021 earnings suggests year-over-year growth of 11% and 25.5%, respectively. Ally Financial Inc. ( ALLY Quick Quote ALLY - Free Report) : Detroit, MI-based Ally Financial is a diversified financial services company providing a broad array of financial products and services, primarily to automotive dealers as well as their customers.The firm sports a Zacks Rank of 1. The Zacks Consensus Estimate for 2021 sales and earnings suggests year-over-year growth of 7.8% and 51.4%, respectively. Its earnings estimates for 2021 have moved north by 7 cents to $3.68 per share over the past 30 days. Mastercraft Boat Holdings, Inc. ( MCFT Quick Quote MCFT - Free Report) : Headquartered in Vonore, TN, MasterCraft designs, manufactures and markets recreational powerboats through its subsidiaries. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings suggests year-over-year growth of 85% and 14%, respectively. The company surpassed earnings estimates in three of the trailing four quarters and missed once, with an average surprise of 38.2%. Ironwood Pharmaceuticals, Inc. ( IRWD Quick Quote IRWD - Free Report) : Cambridge, MA-based Ironwood Pharmaceuticals is focused on the development and commercialization of treatments, primarily addressing gastrointestinal diseases.The Zacks Consensus Estimate for 2020 and 2021 earnings suggests year-over-year growth of 79% and 68.8%, respectively. This Zacks Rank #2 company surpassed earnings estimates in three of the four trailing quarters and missed once, with an average surprise of 34.3%. Resideo Technologies, Inc. ( REZI Quick Quote REZI - Free Report) : U.S.-based Resideo provides critical comfort and security solutions, primarily in residential environments, and is a distributor of low-voltage and security products. The Zacks Consensus Estimate for 2020 sales and earnings suggests year-over-year growth of 27.3% and 79.3%, respectively. The company surpassed earnings estimates in each of the four trailing quarters, with an average surprise of 212.2%.
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