If you are uncertain about whether to invest your money in bonds or stocks, an important metric that can show you the right path is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio comes in handy for finding out undervalued stocks. Also, this ratio is effective for comparing stocks with market or fixed income securities.
Earnings yield can be calculated as (annual earnings per share/market price) x 100. While comparing similar stocks, the one with high earnings yield should fetch higher returns.
This ratio is useful 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 said to be undervalued in comparison to bonds. This means that investing in the stock market is a better option for a value investor.
However, while T-bills are devoid of risks, investing in stocks always carries some inherent risks. Hence, it will be prudent 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 33 stocks that made it through the screen:
Cincinnati, OH-based Fifth Third Bancorp (FITB - Free Report) operates as a diversified financial services company in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 7.2% for the next 3-5 years.
Bedminster, NJ-based GAIN Capital Holdings, Inc. offers trading services and solutions to retail, institutional, and futures service customers worldwide. It has a Zacks Rank #1 and an expected EPS growth rate of 7.5% for the next 3-5 years.
Fort Worth, TX-based American Airlines Group Inc. (AAL - Free Report) operates as a network air carrier. It has a Zacks Rank #2 and an expected EPS growth rate of 7.6% for the next 3-5 years.
Atlanta, GA-based Delta Air Lines, Inc. (DAL - Free Report) provides air transportation for passengers and cargo in the United States and internationally. It has a Zacks Rank #2 and an expected EPS growth rate of 15% 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.