When you are unsure whether to keep your money in stocks or bonds, one key financial metric that can come to your rescue is earnings yield. It is the inverse of the price-to-earnings (P/E) ratio and very useful for spotting undervalued stocks. Also, the ratio comes in handy for investors when they want to compare stocks with the market or fixed income securities.
Earnings Yield can be calculated as (Annual Earnings per Share/Market Price) x 100. It is useful in comparing a stock with other stocks as well as with fixed income securities. While comparing similar stocks, the one which gives high earnings yield should provide better returns.
This ratio is also useful for comparing the performance of a market with the 10-year Treasury yield. When the yield of the market index is higher than the 10-year Treasury yield, stocks can be regarded as undervalued in comparison to bonds. This implies that investing in the stock market is a better choice for a value investor.
However, while T-bills are free of risks, investing in stocks always comes with a caveat. Hence, it would be an excellent idea to add a risk premium to the 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 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.
Here are four of the 17 stocks that made it through the screen:
Volkswagen AG (VLKAY - Free Report) is an automobile manufacturer in Europe. This Zacks Rank #2 stock has an expected EPS growth rate of 18.7% for the next 3–5 years.
Tata Motors Limited (TTM - Free Report) is India’s leading automotive manufacturer. It has a Zacks Rank #2 and an expected EPS growth rate of 46.5% for the next 3–5 years.
TRI Pointe Group, Inc. (TPH - Free Report) is engaged in designing, construction and sale of single-family homes. This Zacks Rank #1 stock has an expected EPS growth rate of 11% for the next 3–5 years.
Olympic Steel, Inc. (ZEUS - Free Report) is a leading U.S. metals service center. This Zacks Rank #1 stock has an expected EPS growth rate of 7.5% 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.
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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