Investors often use P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. However, one can also use another interesting ratio. Earnings yield, expressed in percentage, is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing stocks, if other factors are similar, investors can look out for the one with higher earnings yield. This is because stocks with higher earnings yield have the potential of providing comparatively greater returns.
Firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Earnings yield captures both the tangible and intangible yield of the firm as opposed to dividend yield, which only takes into account the tangible yield. The ratio of dividend yield to earnings yield indicates the proportion of earnings directly distributed in the form of dividend payout.
Importantly, 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.
Earnings Yield: Simply the Inverse of P/E
Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics, i.e. the P/E ratio (stock price/earnings per share). Thus, a firm having a P/E ratio of 10.2 will logically have an earnings yield of 9.8% (100/10.2). In fact, as the concept of earnings yield is already indirectly captured in the P/E ratio, earnings yield as an investment valuation metric is not as widely used as the P/E ratio.
Having said that, it should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio as the former facilitates comparison of stocks with fixed-income securities.
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 42 stocks that made it through the screen. Each of the below-mentioned stocks sports a Zacks Rank #1.
Hologic, Inc. ( HOLX Quick Quote HOLX - Free Report) : Headquartered in Massachusetts, Hologic develops and supplies diagnostics products, medical imaging systems, as well as surgical products for women's health through early detection and treatment in the United States, Europe, the Asia-Pacific, and internationally.It has an expected EPS growth rate of 17.4% for the next three-five years. The Zacks Consensus Estimate for fiscal 2021 revenues and earnings suggests year-over-year growth of 38.2% and 76.9%, respectively. Honda Motor ( HMC Quick Quote HMC - Free Report) : Japan-based Honda is one of the leading manufacturers of automobiles and motorcycles in the world. It has an expected EPS growth rate of 19.2% for the next three-five years. The Zacks Consensus Estimate for fiscal 2022 revenues and earnings suggests year-over-year growth of 8.3% and 41.7%, respectively. Winnebago Industries ( WGO Quick Quote WGO - Free Report) : Iowa-based Winnebago is one of the most significant names in the recreational vehicle (RV) industry. This manufacturer and seller of RVs, as well as marine products — primarily for use in leisure travel and outdoor recreation activities — carries a VGM Score of A. The Zacks Consensus Estimate for fiscal 2021 revenues and earnings suggests year-over-year growth of 36.1% and 129.1%, respectively. Vale S.A. ( VALE Quick Quote VALE - Free Report) : Brazil-based Vale is one of the world’s largest mining companies, and the leading producer of iron ore as well as nickel. It also produces manganese ore, ferroalloys, metallurgical and thermal coal, copper, bauxite, along with cobalt. It has an expected EPS growth rate of 25.1% for the next three-five years. The Zacks Consensus Estimate for fiscal 2021 revenues and earnings suggests year-over-year growth of 18.7% and 64%, respectively. Discover Financial Services ( DFS Quick Quote DFS - Free Report) : Based in Illinois, Discover Financial is a direct banking and payment services company in the United States. The company offers credit cards, personal, student and home loans, as well as deposit products.The Zacks Consensus Estimate for fiscal 2021 revenues and earnings suggests year-over-year growth of 3.8% and 137.9%, respectively.
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