Earnings yield is useful for investors concerned about the rate of return on an investment. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price per share — the inverse of the price-to-earnings (P/E) ratio.
While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is not as widely used as P/E ratio as a valuation metric but investors most commonly compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on the stock is lower than the 10-year Treasury yield, the stock would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued.
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 five of the 60 stocks that made it through the screen:
Genesco Inc. (GCO - Free Report) : Nashville-based specialty retailer, Genesco sells footwear, headwear and accessories in retail stores in the United States and Canada.It sports a Zacks Rank #1 and has an expected EPS growth rate of 5% for the next 3-5 years.
GreenTree Hospitality Group Ltd. (GHG - Free Report) : China-based GreenTree operates as a franchised hotel operator. It operates business chain hotels, serviced apartments, shell inns and hostels. It sports a Zacks Rank #1 and has an expected EPS growth rate of 17.6% for the next 3-5 years.
Bristol-Myers Squibb Company (BMY - Free Report) : New York-based Bristol-Myers is a global specialty biopharmaceutical company focused on the development of treatments targeting serious diseases. It carries a Zacks Rank #2 and has an expected EPS growth rate of 13.4% for the next 3-5 years.
Barclays PLC (BCS - Free Report) : Headquartered in London, Barclays is a major global banking and financial services company. It carries a Zacks Rank #1 and has an expected EPS growth rate of 2.8% for the next 3-5 years.
Valero Energy Corporation (VLO - Free Report) : San Antonio, TX-based Valero Energy Corporation is the largest independent refiner and marketer of petroleum products in the world. It carries a Zacks Rank #2 and has an expected EPS growth rate of 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.
Click here to sign up for a free trial to the Research Wizard today.
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.