Earnings Yield may be a simple yet effective metric to use for investors with exposure to stocks as well as bonds. The ratio is the inverse of the price-to-earnings (P/E) ratio, which is commonly applied to find undervalued stocks. However, when one looks to compare stocks with fixed income securities or the market, earnings yield is a more appropriate ratio.
Earnings Yield is measured as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with higher earnings yield is more likely to provide better returns, with other factors remaining constant.
Earnings Yield can be used to compare the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued in comparison to bonds and vice versa. In such a situation, for value investors, investing in the stock market may be a better option than the bond market.
However, it is important to remember that T-bills are risk free, while stock investments come with a caveat. It would be a good idea to add a risk premium to the Treasury yield while comparing it with earnings yield of a stock or the overall market.
The Winning Strategy
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 to generate 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
Here are four of the 101 stocks that made it through the screen:
JAKKS Pacific, Inc. ( JAKK Quick Quote JAKK - Free Report) : Based in Malibu, JAKKS Pacific is a multi-brand company engaged in designing and marketing a broad range of toys as well as consumer products. The company’s strategic acquisitions, solid international footprint, focus on innovation, and collaborations with popular brands and movie franchisees should boost top-line growth.
JAKKS Pacific has an expected earnings growth rate of 135.5% for the current year. The Zacks Consensus Estimate for the current year has been revised upward by 51 cents over the past 60 days.
JAKKS Pacific beat the Zacks Consensus Estimate for earnings in the last four quarters, with an average surprise of 48.9%. Shares of this Zacks Rank #1 firm have rallied around 120% year to date against the industry’s 19.2% decline.
Party City Holdco Inc. ( PRTY Quick Quote PRTY - Free Report) : Headquartered in New Jersey, this Zacks Rank #2 company is involved in the design, manufacture, and contracts for manufacturing and distribution of party goods, including paper and plastic tableware, metallic and latex balloons, Halloween and other costumes, accessories, novelties, gifts, and stationery. With consumer spending on the rise and the holiday season on the horizon, Party City appears well positioned.
Party City has an expected earnings growth rate of 240.8% for the current year. The Zacks Consensus Estimate for sales for the current year implies year-over-year growth of 17.3%.
Party City beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed once, with an average surprise of 31.5%. Shares of PRTY have inched up around 1.3% year to date versus the industry’s decline of 34.3%.
La-Z-Boy Incorporated ( LZB Quick Quote LZB - Free Report) : Based in Monroe, this company manufactures, markets, imports, exports, distributes, and retails upholstery furniture products, accessories, and case goods furniture products. LaZBoy has been benefiting from strong demand trends across all business units. Further, its solid cash position and investment in business bode well.
La-Z-Boy has an expected earnings growth rate of 43.5% for fiscal 2022. The Zacks Consensus Estimate for the current year has been revised upward by 40 cents over the past seven days.
La-Z-Boy beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed once, with an average surprise of 6.8%. LZB currently carries a Zacks Rank #2.
Tempur Sealy International, Inc. ( TPX Quick Quote TPX - Free Report) : Tempur Sealy is involved in the development, manufacturing and marketing of bedding products, primarily in North America and internationally. The company’s direct channel — the company-owned stores and e-commerce — has been driving growth and profitability. Strength across its brands and products combined with the acquisition of Dreams are other tailwinds for this Zacks Rank #2 company.
Tempur Sealy has an expected earnings growth rate of 71.2% for the current year. The Zacks Consensus Estimate for the current year has been revised upward by 4 cents over the past 30 days.
Tempur Sealy beat the Zacks Consensus Estimate for earnings in the last four quarters, with an average of 22.4%. Shares of TPX have rallied around 63% year to date, outperforming the industry’s 60% rally.
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