Investors often use the P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. 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 the one with higher earnings yield. This is because stocks with earnings yield have the potential to provide comparatively greater returns.Marathon Oil MRO, The Mosaic Company MOS, Univar Solutions Inc. UNVR and Global Ship Lease GSL are some stocks boasting high earnings yield.
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. 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 comparison of stocks with fixed-income securities.
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 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 we discuss four of the 118 stocks that qualified the screen:
Marathon Oil: Headquartered in Houston, TX, Marathon Oil is a global, independent company that is engaged in the exploration, production, and marketing of crude oil and natural gas. The wells drilled by Marathon have extremely low oil price breakeven costs and need oil prices of just $35 a barrel to be profitable. Marathon’s robust operational metrics suggest strong long-term cash flows that should support share price appreciation.
The Zacks Consensus Estimate for Marathon Oil’s fiscal 2022 earnings and sales implies year-over-year growth of 197.5% and 46%, respectively. The fiscal 2022 bottom-line estimate has been revised upward by 64 cents a share over the past seven days.
Mosaic: Minnesota-based Mosaic is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. The company should gain from higher demand for fertilizers. Strong grower economics and crop commodity prices are driving potash demand globally. The acquisition of Vale Fertilizantes and cost-cut initiatives are also likely to boost Mosaic’s prospects.
The Zacks Consensus Estimate for Mosaic’s fiscal 2022 earnings and sales implies year-over-year growth of 143.4% and 58%, respectively. The fiscal 2022 bottom-line estimate has been revised upward by 93 cents a share over the past 30 days.
Univar: Illinois-based Univar is a global distributor of chemical and ingredients, and a provider of specialty services. The company is benefiting from market share gains, operational execution, cost minimization and a robust liquidity position. The acquisition of Nexeo Solutions enhanced UNVR’s capabilities and accelerated its ability to create a significant value for customers, supplier partners, employees as well as shareholders.
The Zacks Consensus Estimate for Univar’s fiscal 2022 earnings and sales implies year-over-year growth of 18.5% and 6%, respectively. The fiscal 2022 bottom-line estimate has been revised upward by 53 cents a share over the past 60 days.
Global Ship Lease: London-based Global Ship Lease owns and operates containerships under long-term, fixed-rate charters to world-class container shipping companies. Containership operators have been substantial beneficiaries of the pandemic and GSL is no exception.Global Ship Lease has seen sustained demand and has supportive supply-side fundamentals for its target fleet segments. GSL’s strong financials and investor-friendly moves are added positives.
The Zacks Consensus Estimate for Global Ship Lease’s fiscal 2022 earnings and sales implies year-over-year growth of 60.3% and 33%, respectively. The fiscal 2022 bottom-line estimate has been revised upward by 54 cents a share over the past 60 days.
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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.
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Marathon Oil Corporation (MRO) : Free Stock Analysis Report
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