The 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 in 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.
Summit Hotel Properties ( INN Quick Quote INN - Free Report) , Meritage Homes Corporation ( MTH Quick Quote MTH - Free Report) , Eagle Pharmaceuticals, Inc. ( EGRX Quick Quote EGRX - Free Report) and BrightSphere Investment Group plc ( BSIG Quick Quote BSIG - Free Report) could be some attractive bets if you are looking for high earnings yield picks.
The earnings yield parameter is often used to compare the performance of a market index with the 10-year Treasury yield. 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.
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 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
Here we discuss four of the 74 stocks that qualified the screen:
Summit Hotel: Summit Hotel is a real estate investment trust focused primarily on owning premium-branded, select-service hotels in the upscale and upper midscale segments of the lodging industry.
The Zacks Consensus Estimate for Summit Hotel’s earnings for the current year has been revised 12.9% upward to 35 cents a share over the past 30 days, implying year-over-year growth of 195%. The same for 2022 earnings has moved 3% north to $1.02 per share, signaling a rise of 191.4% on a year-over-year basis.
Summit Hotel beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed once, with the average surprise being 52%. INN currently sports a Zacks Rank #1.
Meritage Homes: Meritage Homes is one of the leading homebuilders in the United States, primarily engaged in building and selling single-family homes for entry-level, first-time, move-up, luxury, and active adult buyers.
The Zacks Consensus Estimate for Meritage Home’s earnings for the current year has been revised upward by roughly 3% to $19.18 a share over the past 60 days, implying year-over-year growth of 74%. The same for 2022 earnings has moved 9.7% north to $23.44 per share, signaling a rise of 22.2% on a year-over-year basis.
Meritage Homes beat the Zacks Consensus Estimate for earnings in the last four quarters, with the average being 24%. MTH currently sports a Zacks Rank #1.
BrightSphere: This diversified multi-boutique asset management company primarily focuses on equities and fixed income portfolios as well as investments in the timber and real estate sectors.
BrightSphere has an expected earnings growth rate of 65% for 2022. The Zacks Consensus Estimate for the next year has been revised upward by 10 cents over the past 30 days.
BrightSphere beat the Zacks Consensus Estimate for earnings in three of the last four quarters while missing once, with the average surprise being 2.3%. BSIG currently sports a Zacks Rank #1.
Eagle Pharmaceuticals: This specialty pharmaceutical company focuses on developing and commercializing injectable products, primarily in critical care and oncology areas in the United States.
Eagle Pharmaceuticals has an expected earnings growth rate of 170% for 2022. The Zacks Consensus Estimate for the next year has been upwardly revised by 92 cents over the past seven days.
In the trailing four quarters, Eagle Pharmaceuticals beat the Zacks Consensus Estimate twice for as many misses, with the average surprise being 57%. EGRX currently carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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