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.
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 six of the 66 stocks that made it through the screen.
AcelorMittal ( MT Quick Quote MT - Free Report) is the world’s leading steel and mining company. The Zacks Consensus Estimate for 2021 sales and earnings implies year-over-year growth of 33% and 1,484.2%, respectively. The firm currently sports a Zacks Rank #1 and has a VGM Score of A. Dine Brands Global, Inc. ( DIN Quick Quote DIN - Free Report) is a full-service dining company. It operates and franchises restaurants under both Applebee's Neighborhood Grill & Bar and IHOP brands. The Zacks Consensus Estimate for 2021 sales and earnings implies year-over-year growth of 27.5% and 269.3%, respectively. The firm currently flaunts a Zacks Rank #1 and has a VGM Score of B. Smart Global Holdings, Inc. ( SGH Quick Quote SGH - Free Report) : This Zacks Rank #1 stock is a designer, manufacturer and supplier of electronic subsystems to OEMs in the computer, industrial, networking, telecommunications, aerospace and defense markets. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 79.4% and 33.2%, respectively. Greif, Inc. ( GEF Quick Quote GEF - Free Report) is a leading global producer of industrial packaging products and services. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 47.2% and 17.9%, respectively. The firm currently sports a Zacks Rank #1. Avnet, Inc. ( AVT Quick Quote AVT - Free Report) : Avnet is one of the world’s largest distributors of electronic components and computer products. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 55.8% and 9.7%, respectively. The firm currently carries a Zacks Rank #1. Western Digital Corporation ( WDC Quick Quote WDC - Free Report) develops, manufactures, and sells data storage devices as well as solutions. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies year-over-year growth of 26% and 142.4%, respectively. The firm currently has a Zacks Rank #2.
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