Investors often use P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. However, one can also use another interesting ratio. Earnings yield, expressed in percentage, is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing stocks, if other factors are similar, investors can look out for stocks with higher earnings yield. This is because
stocks with higher earnings yield have the potential to provide comparatively greater returns.
You must have heard of dividend yield (Dividend per share/ Market Price), which is one of the classic metrics for valuating stocks. If we substitute dividend per share with earnings per share, we get the earnings yield. Just like the case with dividend yield, firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Notably, earnings yield captures both the tangible and intangible yield of the firm, as opposed to dividend yield, which only takes into account the tangible yield. The ratio of dividend yield to earnings yield indicates the proportion of earnings directly distributed in the form of dividend payout.
Importantly, earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
Earnings Yield: Simply the Inverse of P/E
Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics i.e. the P/E ratio (stock price/earnings per share). Thus, a firm having a P/E ratio of 10.2 will logically have an earnings yield of 9.8% (100/10.2). In fact, as the concept of earnings yield is already indirectly captured in the P/E ratio, earnings yield as an investment valuation metric is not as widely used as the P/E ratio.
Having said that, it should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio as the former facilitates comparisons of stocks with fixed- income securities.
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 Our Picks
Here are five of the 54 stocks that made it through the screen:
Pilgrim's Pride Corporation PPC: Headquartered in Greeley, CO, Pilgrim’s Pride is engaged in the processing, production, marketing and distribution of frozen, fresh as well as value-added chicken products.The firm sports a Zacks Rank #1 and has an expected EPS growth rate of 22.5% for the next 3-5 years. Genesco Inc. GCO: Nashville-based specialty retailer sells footwear, headwear and accessories in retail stores in the United States and Canada. The firm sports a Zacks Rank #1 and has an expected EPS growth rate of 5% for the next 3-5 years. Tenet Healthcare Corporation THC: Headquartered in Dallas, TX, Tenet Healthcare is an investor-owned health care services company, which owns and operates general hospitals and related health care facilities for urban and rural communities. The firm carries a Zacks Rank #2 and has an expected EPS growth rate of 18.8% for the next 3-5 years. Devon energy Corporation ( DVN Quick Quote DVN - Free Report) : Based in Oklahoma City, Devon is an independent energy company, engaged primarily in the exploration, development and production of oil and natural gas. The firm carries a Zacks Rank #2 and has an expected EPS growth rate of 11.74% for the next 3-5 years. Credit Suisse Group CS: The company offers investment products, private banking and financial advisory services, as well as insurance and pension solutions. The firm carries a Zacks Rank #1 and has an expected EPS growth rate of 18.43% for the next 3-5 years.
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