The earnings potential of a stock is an important consideration while making investment decisions. This makes the Earnings Yield ratio a handy tool for stock selection.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. It is the inverse of the P/E ratio. While comparing similar stocks, the one with higher earnings yield has the potential to provide comparatively greater returns.
Earnings yield has an edge over P/E ratio as it can be used to compare a stock with not just other stocks but also with fixed income securities. This metric is often used to compare the performance of a market index with the 10-year Treasury yield.
For instance, if the yield of the market index is more than the 10-year Treasury, stocks can be considered as undervalued than bonds. In such a case, investing in the stock market would be a better option for a value investor.
However, in view of the risk-free nature of T-bills, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall 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.
Here are five of the 53 stocks that made it through the screen:
Bristol-Myers Squibb BMY: Bristol-Myers is a one of the leading global specialty biopharmaceutical companies focused on the development of treatments targeting serious diseases. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 8.4% for the next three-five years.
Vale S.A. VALE: This Brazil-based firm is one of the world’s largest mining companies. It is the world’s largest producer of iron ore, iron ore pellets and nickel. The company sports a Zacks Rank #1 at present. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 27%.
Gilead Sciences GILD: Gilead is a pioneer in developing drugs for the treatment of human immunodeficiency virus, liver diseases, hematology/oncology diseases and inflammation/respiratory diseases. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 3.5% for the next three-five years.
The Kroger Co. KR: Kroger operates supermarkets and convenience stores in the United States. The firm also manufactures and processes some of the foods sold by its supermarkets. The stock currently carries a Zacks Rank #1 and has an expected EPS growth rate of 5.5% for the next three-five years.
Delek Logistics Partners, LP. DKL: This Tennessee-based master limited partnership owns, operates, acquires, and constructs crude oil as well as refined product logistics and marketing assets. The firm presently carries a Zacks Rank #2 and its 2020 earnings estimates indicate year-over-year growth of 18.4%.
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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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Gilead Sciences, Inc. (GILD) : Free Stock Analysis Report
Bristol Myers Squibb Company (BMY) : Free Stock Analysis Report
VALE S.A. (VALE) : Free Stock Analysis Report
The Kroger Co. (KR) : Free Stock Analysis Report
Delek Logistics Partners, L.P. (DKL) : Free Stock Analysis Report
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