If you are not sure whether to put your money in stocks or bonds, one key financial parameter that can show you the right direction is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio can be effectively used for figuring out undervalued stocks. Also, this ratio can be used for comparing stocks with the market or fixed income securities.
Earnings yield can be computed as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with high earnings yield should generate higher returns.
This ratio can be utilized for comparing the performance of the 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 viewed as undervalued in comparison to bonds. This means that investing in the stock market is a better choice for a value investor.
However, while T-bills are devoid of risks, investing in stocks always involves some inherent risks. Hence, it would be wise to add a risk premium to the Treasury yield while comparing 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 36 stocks that made it through the screen:
Charlotte, NC-based, Nucor Corporation (NUE - Free Report) is a leading producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 12% for the next 3–5 years.
Pittsburgh, PA-based United States Steel Corp. (X - Free Report) is a leading steel manufacturer in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 8% for the next 3–5 years.
Based in Scottsdale, AZ, Meritage Homes Corporation (MTH - Free Report) is a leading public homebuilder in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 15% for the next 3–5 years.
Tucker, GA-based GMS Inc. (GMS - Free Report) is a distributor of wallboard and suspended ceilings systems. It has a Zacks Rank #2 and an expected EPS growth rate of 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.
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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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