The earnings potential of a stock is an important consideration while making investment decisions. This makes the Earnings Yield ratio a handy tool for stock selection.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. It is the inverse of the P/E ratio. While comparing similar stocks, the one with the higher earnings yield has the potential to provide comparatively greater returns.
Earnings yield has an edge over P/E ratio as it can be used to compare a stock with not just other stocks but also with fixed income securities. 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 than bonds. In such a case, investing in the stock market would be a better option for a value investor.
However, bearing in mind the risk-free nature of T-bills, 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 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.
Here are four of the 13 stocks that made it through the screen:
Tailored Brands, Inc. (TLRD - Free Report) is a specialty retailer of men's suits and provider of tuxedo rental product primarily in the U.S. and Canada. This Zacks Rank #2 company has an expected EPS growth rate of 17.5% for the next 3–5 years.
NN Inc. (NNBR - Free Report) is an independent manufacturer and supplier of high quality, precision steel balls and rollers to both domestic and international anti-friction bearing manufacturers. This Zacks Rank #1 stock has an expected EPS growth rate of 20% for the next 3–5 years. You can see the complete list of today’s Zacks #1 Rank stocks here.
Volkswagen AG (VLKAY - Free Report) is one of the largest automobile manufacturers in the world. The company carries a Zacks Rank #2 and its expected EPS growth rate for the next 3–5 years is 24.6%.
KKR & Co. L.P. (KKR - Free Report) provides a range of asset management services to its investors and provides capital markets services to its firm, portfolio companies and clients. This Zacks Rank #2 company has an expected EPS growth rate of 20.7% for the next 3–5 years.
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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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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