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Book Profits by Investing in These High Earnings Yield Picks

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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 stocks with higher earnings yield. This is because stocks with higher earnings yield have the potential of providing comparatively greater returns.

Just like the case with dividend yield, 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 a firm, as opposed to dividend yield, which only takes into account the tangible yield.

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.

Screening Parameters

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 four of the 50 stocks that made it through the screen.

Petrobras (PBR - Free Report) : Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil and one of the most significant in Latin America. The company is riding high on the back of its impressive portfolio, particularly in the country’s pre-salt reservoirs, and projects to increase output by 2024. It currently flaunts a Zacks Rank #1 and has a VGM Score of A. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 260.5% and 31.4%, respectively.

Himax Technologies (HIMX - Free Report) : This semiconductor manufacturer, based in Taiwan, currently carries a Zacks Rank #2 and has a VGM Score of A. A rebounding smartphone market bodes well for the firm and is resulting in an uptick in the demand for its smartphone TDDI solutions, AMOLED driver ICs and PMIC for 5G smartphones. Continued momentum in the demand for automotive driver ICs, and increasing usage of WLO in technologies across nanoimprinting manufacturing and diffraction optics also augur well. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 256.7% and 38.4%, respectively.

Tenneco (TEN - Free Report) : Based in Illinois, this auto equipment provider currently sports a Zacks Rank #1 and has a VGM Score of A. Tenneco’s sharpened focus on innovation, product optimization and cost-containment efforts are praiseworthy. The buyout of Ohlins has expanded Tenneco’s product offerings and accelerated the development of advanced original equipment intelligent suspension solutions. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 931.8% and 16.2%, respectively.

The Chemours Company (CC - Free Report) : Wilmington-based Chemours is a leading provider of performance chemicals that are key ingredients in end products and processes across a host of industries. The firm should gain from strong demand for Opteon refrigerant. Its cost actions, strong liquidity position and investor-friendly moves boost optimism. The firm currently carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 51.5% and 14.6%, respectively.

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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 athttps://www.zacks.com/performance