Investors often use P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. However, one can also use another interesting ratio, which is simply the inverse of P/E ratio, i.e. earnings yield.
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 stocks with higher earnings yield. This is because stocks with higher earnings yield have the potential to provide comparatively greater returns.
Amid economic downturn following the coronavirus outbreak, it is prudent to fortify your portfolio for such conditions. Especially in such scenarios, investors are on the lookout for stocks at great values. Firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced.
Earnings yield can 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.
However, you need to keep in mind that T-bills are risk free, while investing in stocks always comes with a caveat. Hence, 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 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 five of the 77 stocks that made it through the screen:
Avid Technology, Inc. AVID: The firm develops, markets, sells and supports a wide range of software and systems for creating and manipulating digital media content. This Zacks Rank #1 company has an expected EPS growth rate of 20% for the next three-five years.
Navient Corporation NAVI: Headquartered in Wilmington, DE, Navient is a leading provider of education loan management and business processing solutions for education, healthcare, and government clients at the federal, state and local levels. This Zacks Rank #1 company has an expected EPS growth rate of 18% for the next three-five years.
Sykes Enterprises, Incorporated SYKE: The firm, currently sporting a Zacks Rank #1, is a global business process outsourcing leader in providing comprehensive inbound customer engagement services. It has an expected EPS growth rate of 10% for the next three-five years.
Kirkland Lake Gold Ltd. KL: This Zacks Rank #2 company engages in mining and mineral exploration, with primary focus on gold assets. It has an expected EPS growth rate of 3% for the next three to five years.
Select Medical Holdings Corporation SEM: This Zacks Ranked #2 firm operates specialty hospitals and outpatient rehabilitation clinics. The company has an expected EPS growth rate of 15% for the next three to five years.
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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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Avid Technology, Inc. (AVID) : Free Stock Analysis Report
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Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report
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