Value investing, a time-tested investment strategy, involves identifying undervalued stocks that have the potential for long-term growth. By purchasing stocks at a price below their intrinsic value, investors create a margin of safety. Value investors have the potential to generate high returns. When the market eventually realizes the true value of a company, the stock price can rise significantly, providing substantial gains for investors who bought the same at a discounted price.
One key metric in value investing is earnings yield, which allows investors to evaluate the earnings potential of a company relative to its market price.
Compania Cervecerias Unidas S.A. ( CCU Quick Quote CCU - Free Report) , Wabash National Corporation ( WNC Quick Quote WNC - Free Report) , Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA), JinkoSolar Holding Co., Ltd. ( JKS Quick Quote JKS - Free Report) and Inotiv Inc. ( NOTV Quick Quote NOTV - Free Report) .
In this article, we will explore the concept of earnings yield and how it can be effectively utilized in a value investing strategy.
Understanding Earnings Yield
Earnings yield is a financial ratio that measures the earnings generated by a company relative to its market price. It is calculated by dividing the earnings per share (EPS) by the current market price per share and expressing it as a percentage. The higher the earnings yield, the greater the return potential for investors.
By using the earnings yield metric, value investors can identify stocks that have the potential to deliver attractive returns. A high earnings yield implies that a company's earnings are relatively high compared to its market price, indicating an undervalued stock. Conversely, a low earnings yield suggests that the stock may be overvalued.
However, it is crucial to consider other factors when evaluating a stock's potential, such as the company's competitive advantage, financial stability and growth prospects. The earnings yield should be used in conjunction with other fundamental analysis tools to make well-informed investment decisions.
Key Advantages of Earnings Yield
The earnings yield metric offers several advantages for value investors. Firstly, it provides a more accurate representation of a company's true value by considering its earnings in relation to its market price. Secondly, it helps investors identify potential investment opportunities by highlighting undervalued stocks that may have been overlooked by the market. Lastly, earnings yield allows investors to compare the relative attractiveness of different stocks within an industry or sector, assisting in portfolio diversification.
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 undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor. 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 the comparison of stocks with fixed-income securities.
By incorporating the earnings yield metric into their investment approach, value investors can unearth hidden gems and position themselves for success in the ever-changing market.
The Winning Strategy
We have set an
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 Picks
Here we discuss five of the 37 stocks that qualified the screen:
Compania Cervecerias Unidas is a multinational beverage company with diversified businesses and operations in Chile, Argentina, Bolivia, Colombia, Paraguay and Uruguay. The firm also exports its products to Europe, Latin America, the United States, Canada, Asia and Oceania.
The Zacks Consensus Estimate for CCU’s 2023 and 2024 earnings implies year-over-year growth of 81.4% and 27.6%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 2 cents and 6 cents, respectively, over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
Wabash’s offerings include connected solutions for the transportation, logistics, and distribution industries. WNC designs, manufactures, and services products such as dry freight and refrigerated trailers, tank trailers, dry and refrigerated truck bodies, trailer aerodynamic solutions, and much more.
The Zacks Consensus Estimate for WNC’s 2023 sales and earnings implies year-over-year growth of 12% and 90.7%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 52 cents and 16 cents, respectively, over the past 30 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Loma Negra is a cement manufacturer, focusing on the production and commercialization of cement, masonry cement, aggregates, concrete and lime.
The Zacks Consensus Estimate for LOMA’s 2023 earnings implies year-over-year growth of 784.6%. Estimates for 2023 and 2024 earnings per share have moved up by 18 cents and 25 cents, respectively, over the past 30 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
JinkoSolar is a widely famous solar technology company with its business covering the core links of the photovoltaic industry chain.
The Zacks Consensus Estimate for JKS’ 2023 and 2024 earnings implies year-over-year growth of 60% and 15.5%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by $1.64 and 95 cents, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
Inotiv is a pharmaceutical development company. It is involved in providing contract research services and monitoring instruments to emerging pharmaceutical companies.
The Zacks Consensus Estimate for NOTV’s fiscal 2023 and 2024 earnings implies year-over-year growth of 126.6% and 220%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 9 cents and 6 cents, respectively, over the past 30 days. The stock currently carries a Zacks Rank #2 and has a Value Score of A.
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