For smart investors who are willing to invest their money either in bonds or stocks, information on certain financial parameters is crucial. One such important parameter is earnings yield. It is the inverse of the price-to-earnings (P/E) ratio. This ratio is very useful in figuring out undervalued stocks. It can also come in handy while comparing stocks with the market or fixed income securities.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing stocks coming from the same sector or industry, the one with higher earnings yield is likely to fetch better returns.
For comparing the performance of a market index with the 10-year Treasury yield, this ratio is very useful. When the yield of the market index is more than the 10-year Treasury yield, the stocks can be considered as undervalued in comparison to bonds. This indicates that investing in the stock market is a better option for a value investor.
Though Treasury-bill investments are risk free, investing in stocks always comes with a caveat. Hence, it is a good idea to add a risk premium to Treasury yield while comparing it with the earnings yield of a stock or the broader market.
The Winning Strategy
We have set Earnings Yield greater than 9% 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.
Here are four of the 11 stocks that made it through the screen:
Irving, TX-based Nexstar Media Group, Inc. (NXST - Free Report) is a television broadcasting and digital media company in the United States. It has a Zacks Rank #1 and an expected EPS growth rate of 6.5% for the next 3–5 years.
Boise, ID-based Micron Technology, Inc. (MU - Free Report) is a semiconductor systems provider. It has a Zacks Rank #1 and an expected EPS growth rate of 10% for the next 3–5 years.
Zurich, Switzerland-based UBS Group AG (UBS - Free Report) is engaged in providing financial advice and solutions to clients worldwide. It has a Zacks Rank #2 and an expected EPS growth rate of 12.4% for the next 3–5 years.
Atlanta, GA-based Gray Television, Inc. (GTN - Free Report) is a television broadcast company, which owns and operates television stations and digital assets in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 6.5% 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.
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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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