If you are undecided on whether to keep your money in stocks or bonds, one important financial metric that can show you the right direction is earnings yield. It is the inverse of the price-to-earnings (P/E) ratio. This ratio can be effectively used for spotting undervalued stocks. Also, this ratio can be utilized for comparing stocks with the market or fixed income securities.
Earnings yield can be calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one that has a high earnings yield should give higher returns.
This ratio is also useful 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 viewed as undervalued in comparison to bonds. This means that investing in the stock market is a better choice for a value investor.
However, while T-bills are free of risks, investing in stocks always involves some inherent risks. Hence, it would be wise to add a risk premium to the Treasury yield while comparing 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.
Here are four of the 15 stocks that made it through the screen:
Los Angeles, CA-based KB Home (NYSE:KBH) constructs and sells a variety of new homes. It has a Zacks Rank #2 and an expected EPS growth rate of 16% for the next 3–5 years.
Philadelphia, PA-based Crown Holdings, Inc. (NYSE:CCK) is a leading supplier of packaging products. It has a Zacks Rank #1 and an expected EPS growth rate of 7% for the next 3–5 years.
Jacksonville, FL-based Rayonier Advanced Materials Inc (NYSE:RYAM) operates as a global supplier of cellulose specialties products, a natural polymer for the chemical industry. It has a Zacks Rank #2 and an expected EPS growth rate of 19.2% for the next 3–5 years.
Hamilton, Bermuda-based Triton International Ltd (NYSE:TRTN) offers acquisition, leasing, re-leasing, and sale of intermodal containers. It has a Zacks Rank #2 and an expected EPS growth rate of 10% 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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