If you are not sure whether to invest your money in bonds or stocks, a key 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 very 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.
This ratio is very effective 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 implies that investing in the stock market is a better option for a value investor.
However, while T-bills are free from risks, investing in stocks always carries 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 34 stocks that made it through the screen:
Atlanta, GA-based Delta Air Lines (DAL - Free Report) is a leading provider of scheduled air transportation for passengers and cargo throughout the United States and around the world. It has a Zacks Rank #1 and an expected EPS growth rate of 18% for the next 3-5 years.
Chicago-based United Airlines Holdings (UAL - Free Report) is responsible for transporting people and cargo not only throughout North America but also destinations in Asia, Europe, the Middle East and Latin America. It has a Zacks Rank #2 and an expected EPS growth rate of 22% for the next 3-5 years.
New York-based Bristol-Myers Squibb Company (BMY - Free Report) is a global specialty biopharmaceutical company focused on the development of treatments targeting serious diseases. It has a Zacks Rank #1 and an expected EPS growth rate of 4.7% for the next 3-5 years.
Irving, TX-based Commercial Metals Company (CMC - Free Report) manufactures, recycles and markets steel and metal products, related materials and services. It has a Zacks Rank #2 and an expected EPS growth rate of 3.8% 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.