If you are not sure of whether to put your hard-earned money in stocks or bonds, one key parameter that can guide you properly is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio can help in pinpointing the undervalued stocks. Also, this ratio comes in handy while comparing stocks with the market or fixed income securities.
Earnings yield can be computed as (annual earnings per share/market price) x 100. While comparing similar stocks, the one with high earnings yield should give higher returns.
This ratio can be used for comparing the performance of the market with the 10-year Treasury yield. When the yield of the market index is higher than the 10-year Treasury yield, stocks can be said to be undervalued in comparison to bonds. This means that investing in the stock market is a better option for a value investor.
However, while T-bills are devoid of risks, investing in stocks always carry some inherent risks. Hence, it would be wise to add a risk premium to the Treasury yield while making comparison with the earnings yield of a stock or the broader 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 four of the 33 stocks that made it through the screen:
Conn’s, Inc. CONN is a specialty retailer currently operating in Texas and Louisiana. It has a Zacks Rank #1 and an expected EPS growth rate of 23% for the next 3-5 years.
Based in Riverwoods, IL, Discover Financial Services DFS is a direct banking and payment services company in the United States. It has a Zacks Rank #2 and an expected EPS growth rate of 12.5% for the next 3-5 years.
New York-based Citigroup Inc. C is globally diversified financial services holding company. It has a Zacks Rank #2 and an expected EPS growth rate of 11.4% for the next 3-5 years.
Tucker, GA-based GMS Inc. GMS is a distributor of wallboard and suspended ceilings systems. It has a Zacks Rank #2 and an expected EPS growth rate of 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.
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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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Citigroup Inc. (C) : Free Stock Analysis Report
GMS Inc. (GMS) : Free Stock Analysis Report
Discover Financial Services (DFS) : Free Stock Analysis Report
Conn's, Inc. (CONN) : Free Stock Analysis Report
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