Earnings Yield may be a simple yet effective metric for investors with exposure to stocks as well as bonds. The ratio is the inverse of the price-to-earnings 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.
Royal Dutch Shell , Goodyear Tire ( GT Quick Quote GT - Free Report) , Pfizer ( PFE Quick Quote PFE - Free Report) and Crocs, Inc. ( CROX Quick Quote CROX - Free Report) could be some attractive bets if you are looking for high earnings yield picks.
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.
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 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 are four of the 88 stocks that made it through the screen:
Royal Dutch Shell: This integrated energy major currently sports a Zacks Rank #1. Shell’s position as a key supplier of liquefied natural gas should benefit its long-term cash flow growth. RDS.A’s solid progress toward the transition to a renewable energy-focused future is commendable. The firm’s cost-cut initiatives, investment grade ratings and robust buyback program augur well.
The Zacks Consensus Estimate for Shell’s 2022 earnings and sales implies year-over-year growth of 43% and 6%, respectively. The 2022 bottom-line estimate has been revised upward by 32 cents a share over the past 30 days.
Goodyear: The leading tire making company currently flaunts a Zacks Rank #1. The acquisition of Cooper Tire has strengthened GT’s leadership position in the global tire industry. Initiatives like Goodyear SightLine and partnership with ZF demonstrate the firm’s efforts to cater to the changing dynamics of the auto industry. The frequent rollout of innovative products and restructuring efforts bode well.
The Zacks Consensus Estimate for Goodyear’s 2022 earnings and sales implies year-over-year growth of 51.7% and 11%, respectively. The 2022 bottom-line estimate has been revised upward by 3 cents a share over the past 30 days.
Pfizer: This pharma giant currently sports a Zacks Rank #1. Pfizer expects strong growth of key brands like Ibrance, Inlyta and Eliquis to drive sales. PFE’s COVID-19 vaccine has become a key contributor to its top line. The approval of Paxlovid, Pfizer’s oral antiviral pill for COVID-19, will bring in additional revenues in 2022. PFE boasts a sustainable pipeline with multiple late-stage programs that can drive growth.
The Zacks Consensus Estimate for Pfizer’s 2022 earnings and sales implies year-over-year growth of 39% and 18%, respectively. The 2022 bottom-line estimate has been revised upward by 14 cents a share over the past 30 days.
Crocs: This booming footwear brand currently flaunts a Zacks Rank #1. Crocs has been gaining from sturdy consumer demand for its brands. The company’s focus on product innovation and marketing, digital capabilities, and tapping of growth opportunities in Asia bode well. The impending buyout of privately-owned competitor HEYDUDE is set to boost prospects further. CROX expects to generate revenues of more than $5 billion by 2026, representing a CAGR of more than 17% in the next five years.
The Zacks Consensus Estimate for Crocs’ 2022 earnings and sales implies year-over-year growth of 26% and 49%, respectively. The 2022 bottom-line estimate has been revised upward by 15 cents a share over the past 30 days.
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