If you are not sure whether to invest your money in bonds or stocks, an important 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 is very effective for determining undervalued stocks. Also, this ratio is useful for comparing stocks with the 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.
The ratio is handy for comparing the performance of the market with the 10-year Treasury yield. When the yield of the market index exceeds the 10-year Treasury yield, stocks can be said to be 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 involves some inherent risks. Hence, it will 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 33 stocks that made it through the screen:
New York-based Citigroup Inc. (C - Free Report) is a globally diversified financial services holding company, providing a range of financial products and services including consumer banking and credit, corporate and investment banking, securities brokerage and wealth management to consumers, corporations, governments and institutions. It has a Zacks Rank #2 and an expected EPS growth rate of 12.2% for the next 3-5 years.
Columbus, OH-based DSW Inc. (DBI - Free Report) designs, produces and retails footwear and accessories. It has a Zacks Rank #2 and an expected EPS growth rate of 15% for the next 3-5 years.
Summit, NJ-based Celgene Corporation is a global biopharmaceutical company engaged in the discovery, development and commercialization of innovative therapies for the treatment of cancer and immune-inflammatory diseases. It has a Zacks Rank #2 and an expected EPS growth rate of 21.5% for the next 3-5 years.
Salt Lake City, UT-based Zions Bancorporation (ZION - Free Report) is a diversified financial service provider, operating a widespread network of nearly 430 banking offices. It has a Zacks Rank #2 and an expected EPS growth rate of 8.9% 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.