Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand over the more commonly used P/E ratio as it facilitates comparison of stocks with fixed-income securities. Interestingly, it is simply the inverse of P/E ratio.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater returns. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield can also 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.
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 their 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 63 stocks that made it through the screen:
Alexion Pharmaceuticals ALXN: Based in New Haven, Alexion is a biopharmaceutical company focused on the development and commercialization of life-transforming drugs, for the treatment of patients with ultra-rare disorders. This Zacks Rank #2 company has an expected EPS growth rate of 12.68% for the next three-five years.
Cassava Sciences Inc. SAVA: Based in Austin, the Zacks Rank #2 firm is focused on the early detection and treatment of neurodegenerative diseases, such as Alzheimer's. Earnings of Cassava are estimated to grow 451.8% in 2020.
B2Gold Corp. BTG:Vancouver-based B2Gold Corp. is a gold producer with three operational mines — one each in Mali, Namibia, Philippines. This Zacks Rank #1 company has an expected EPS growth rate of 16.3% for the next three-five years.
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 68.6% in 2020.
Curo Group Holdings Corp. CURO: Headquartered in the United States, the firm operates as a consumer finance company and provides unsecured and secured installment, open-end and single-pay loan services. This Zacks Rank #1 company has an expected EPS growth rate of 12.1% in 2020.
Kinross Gold Corporation (KGC): Based in Ontario, the firm is primarily involved in the exploration and operation of gold mines. Earnings of Kinross are estimated to grow 52.9% in 2020.
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.
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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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Alexion Pharmaceuticals, Inc. (ALXN) : Free Stock Analysis Report
Avid Technology, Inc. (AVID) : Free Stock Analysis Report
B2Gold Corp (BTG) : Free Stock Analysis Report
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Cassava Sciences, Inc. (SAVA) : Free Stock Analysis Report
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