The price-to-earnings (P/E) ratio is often used by investors to handpick undervalued stocks. However, you can use another interesting ratio — earnings yield — to compare a stock with not just other market participants but also fixed income securities.
Simply put, earnings yield is the inverse of the P/E ratio. It is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with higher earnings yield has the potential to provide comparatively greater returns.
This metric is often 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, given the risk-free nature of T-bills, it is necessary to add a risk premium to their yield while making comparisons with 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 their 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 44 stocks that made it through the screen:
TEGNA Inc. (TGNA - Free Report) : TEGNA has evolved as one of the largest U.S. broadcasting groups and a leading local news and media content provider, thanks to a plethora of acquisitions.The company currently carries a Zacks Rank #1 and its expected EPS growth rate for the next three-five years is 10%.
Vistra Energy Corporation (VST - Free Report) : Vistra Energy offers electricity and power generation, distribution and transmission solutions. The stock currently carries a Zacks Rank #1 and has an expected EPS growth rate of 18.9% for the next three-five years.
Bristol-Myers Squibb (BMY - Free Report) : Bristol-Myers 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 8.4% for the next three-five years.
Gilead Sciences (GILD - Free Report) : Gilead 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 3.5% for the next three-five years.
Teekay Tankers Ltd. (TNK - Free Report) : Teekay Tankers provides oil transportation services through a fleet of mid-size tankers, including Suezmax and Aframax crude oil tankers and Long Range 2 product tankers. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 3% for the next three-five 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