If you are unsure whether you should invest your money in stocks or bonds, one important financial parameter that can show you the right direction is earnings yield. It is the inverse of the price-to-earnings (P/E) ratio and can be used for identifying undervalued stocks. In addition to this, the ratio is very useful 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 with high earnings yield should provide better returns.
This ratio also comes in handy for comparing the performance of a market with the 10-year Treasury yield. When the yield of the market index exceeds the 10-year Treasury yield, stocks can be regarded as undervalued in comparison to bonds. This implies 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 comes with a caveat. 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.
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.
Below we have highlighted four of the 43 stocks that made it through the screen.
Steel Dynamics, Inc. STLD: Based in Fort Wayne, Steel Dynamics is among the leading steel producers and metal recyclers in the United States. The company is expected to gain from acquisitions, strong liquidity and efforts to expand capacity. The acquisitions of Heartland and United Steel Supply have boosted Steel Dynamics' shipping capabilities. Moreover, the buyout of Zimmer will support its raw material procurement strategy at the new Texas flat roll steel mill. The stock currently sports a Zacks Rank #1 and has a long-term EPS growth rate of 12%.
The Children’s Place, Inc. PLCE: Based in Secaucus, Children’s Place is the largest pure-play children’s specialty apparel retailer in North America. The company’s growth efforts such as enhancing digital capabilities, augmenting supply chain and improving financial flexibility augur well. Focus on the “Superior Product” strategy will help the firm to resonate well with millennial customers and boost omni-channel capabilities, in turn driving operating margin expansion as well as shareholder value. The stock currently flaunts a Zacks Rank #1 and has a long-term EPS growth rate of 8%.
Micron Technology MU: Idaho-based Micron has established itself as one of the leading worldwide providers of semiconductor memory solutions. High demand for memory chips from cloud-computing providers and acceleration in 5G adoption bode well for the company. The firm’s strategic buyouts, operational efficiency and efforts to increase the mix of high-value solutions in its portfolio are likely to boost margins. Micron’s strong financials and investor-friendly moves are also praiseworthy. The stock currently carries a Zacks Rank #2 and has a long-term EPS growth rate of 15.7%.
Allison Transmission Holdings, Inc. ALSN: Headquartered in Indianapolis, Allison is the largest producer of fully-automatic transmissions, holding the leading position in several niche markets. The firm’s diverse revenue sources, especially from the defense end market, provide it with a hedge against economic cycles and disruptions. Strategic buyouts of Walker Die, C&R Tool & Engineering, Vantage Power and AxleTech’s electric vehicle systems division are set to boost Allison’s long-term prospects. The stock currently carries a Zacks Rank #2 and has a long-term EPS growth rate of 7%.
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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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Steel Dynamics, Inc. (STLD) : Free Stock Analysis Report
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