The earnings potential of a stock is an important consideration while making investment decisions. This makes the Earnings Yield ratio a handy tool for stock selection.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. It is the inverse of the P/E ratio. While comparing similar stocks, the one with higher earnings yield has the potential to provide comparatively greater returns.
Earnings yield has an edge over P/E ratio as it can be used to compare a stock with not just other stocks but also with fixed income securities. This metric is often used to compare the performance of a market index with the 10-year Treasury yield.
For instance, if the yield of the market index is more than the 10-year Treasury, stocks can be considered as undervalued than bonds. In such a case, investing in the stock market would be a better option for a value investor.
However, in view of the risk-free nature of T-bills, 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.
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 of generating 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 37 stocks that made it through the screen:
New York based Bristol-Myers Squibb (BMY - Free Report) is a one of the leading global specialty biopharmaceutical companies focused on the development of treatments targeting serious diseases. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 8.3% for the next three-five years.
Headquartered in Foster City, CA, Gilead Sciences (GILD - Free Report) is a pioneer in developing drugs for the treatment of human immunodeficiency virus, liver diseases, hematology/oncology diseases and inflammation/respiratory diseases. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 3.7% for the next three-five years.
Vancouver-based B2Gold Corp (BTG - Free Report) is a gold producer with three operational mines — one each in Mali, Namibia, Philippines. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 8.3% for the next three-five years.
New York-based Chembio Diagnostics, Inc. (CEMI - Free Report) develops, manufactures, licenses and markets proprietary rapid diagnostic tests in the growing $5 billion point-of-care testing market. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 8.3% for the next three-five years.
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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.