Now that the coronavirus-induced market volatility has gripped Wall Street, the hunt for quality stocks has increased. In this respect, earnings yield can be one of the reliable metrics to pick profit generating stocks. Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater returns.That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand over the more commonly used P/E ratio as it facilitates comparison of stocks with fixed-income securities. Interestingly, it is simply the inverse of P/E ratio.
Earnings yield can 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.
However, you need to keep in mind that T-bills are risk free, while investing in stocks always comes with a caveat. Hence, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall 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 five of the 95 stocks that made it through the screen:
Western Digital Corporation (WDC - Free Report) : Headquartered in Irvine, CA, Western Digital is one of the largest hard disk drive (HDD) producers in the United States. It sports a Zacks Rank #1 and has an expected EPS growth rate of 2% for the next 3-5 years.
Avid Technology, Inc. (AVID - Free Report) : The company develops, markets, sells and supports a wide range of software and systems for creating and manipulating digital media content. It carries a Zacks Rank #2 and has an expected EPS growth rate of 15% for the next 3-5 years.
eBay Inc. (EBAY - Free Report) : San Jose, CA-based eBay is one of the largest online retailers in the world. It sports a Zacks Rank #1 and has an expected EPS growth rate of 11.3% for the next 3-5 years.
The Ensign Group, Inc. (ENSG - Free Report) : Headquartered in Mission Viejo, CA, The Ensign Group provides health care services in the post-acute care continuum, urgent care center and mobile ancillary businesses in the United States. It sports a Zacks Rank #1 and has an expected EPS growth rate of 15% for the next 3-5 years.
Tenet Healthcare Corporation (THC - Free Report) : Headquartered in Dallas, TX, the company is an investor-owned health care services company, which owns and operates general hospitals and related health care facilities for urban and rural communities in numerous states. It carries a Zacks Rank #2 and has an expected EPS growth rate of 8.7% 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.