Price-to-earnings (P/E) ratio is often used by investors to pick undervalued stocks. Yet, it is difficult to use the P/E ratio to compare stocks with fixed income securities. This is where the inverse strategy — Earnings Yield — comes handy.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with higher earnings yield has the potential of providing comparatively greater returns.
This metric is often used to compare the performance of a market index with the 10-year Treasury yield as well. For instance, if the yield of the market index is more than the 10-year Treasury, stocks can be considered as undervalued in comparison to bonds. In such a case, investing in the stock market would be a better option for a value investor.
You need to keep in mind that T-bills are safe bets while stock investments always have an element of risk. Hence, it would be prudent to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall market.
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 85 stocks that made it through the screen.
Donnelley Financial Solutions, Inc. ( DFIN Quick Quote DFIN - Free Report) : This Illinois-based company is a noted player in risk and compliance solutions, offering insightful technology, industry expertise and data insights to clients globally. The Zacks Consensus Estimate for 2021 and 2022 earnings implies year-over-year growth of 97% and 9%, respectively. The firm currently sports a Zacks Rank #1 (Strong Buy) and has a Value Score of A. Ironwood Pharmaceuticals, Inc. ( IRWD Quick Quote IRWD - Free Report) : This Cambridge-based company is focused on the development and commercialization of treatments, primarily addressing gastrointestinal diseases. The Zacks Consensus Estimate for 2021 earnings and sales implies year-over-year growth of 158% and 7%, respectively. The firm currently sports a Zacks Rank #1. Lennar Corporation ( LEN Quick Quote LEN - Free Report) : This Miami-based company is engaged in homebuilding and financial services in the United States. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies year-over-year growth of 72% and 4%, respectively. The firm currently sports a Zacks Rank #1. Brinker International, Inc. ( EAT Quick Quote EAT - Free Report) : This Texas-based firm primarily owns, operates, develops and franchises various restaurants under Chili’s Grill & Bar as well as Maggiano’s Little Italy brands. The company currently carries a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies year-over-year growth of 83.6% and 62.6%, respectively. Smart Global Holdings, Inc. ( SGH Quick Quote SGH - Free Report) : This Zacks Rank #2 stock is a designer, manufacturer and supplier of electronic subsystems to OEMs in computer, industrial, networking, telecommunications, aerospace as well as defense markets. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies year-over-year growth of 80% and 24%, respectively.
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Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance