For intelligent investors who intend to invest money either in bonds or stocks, information on certain key financial parameters is very important. One such key parameter is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio is vital for tracking undervalued stocks. It also comes in handy for comparing stocks with the market or fixed income securities.
Earnings yield can be derived as (Annual Earnings per Share/Market Price) x 100. While comparing stocks from the same sector or industry, the one with higher earnings yield is likely to fetch better returns.
For comparing the performance of a market index with the 10-year Treasury yield, this ratio is very useful. When the yield of the market index is higher than the 10-year Treasury yield, the stocks can be dubbed as undervalued in comparison to bonds. This indicates that investing in the stock market is a better choice for a value investor.
Investment in Treasury-bill is risk free. However, investing in stocks always comes with a caveat. Hence, it is a good idea to add a risk premium to Treasury yield while comparing it with the earnings yield of a stock or the broader market.
The Winning Strategy
We have set Earnings Yield greater than 9% 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.
Here are four of the 10 stocks that made it through the screen:
Boise, ID-based Micron Technology, Inc. (NASDAQ:MU) is a semiconductor systems provider. It has a Zacks Rank #1 and an expected EPS growth rate of 10% for the next 3–5 years.
Irving, TX-based Nexstar Media Group, Inc. (NASDAQ:NXST) is a television broadcasting and digital media company. It has a Zacks Rank #2 and an expected EPS growth rate of 6.5% for the next 3–5 years.
Oklahoma City, OK-based Gulfport Energy Corporation (NASDAQ:GPOR) owns and operates oil and gas properties. It has a Zacks Rank #2 and an expected EPS growth rate of 30% for the next 3–5 years.
London, UK-based Barclays PLC (NYSE:BCS) provides various financial products and services worldwide. It has a Zacks Rank #2 and an expected EPS growth rate of 16.8% 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.
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.
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