If you are not sure whether to invest your money in bonds or stocks, a key parameter that can show you the right direction is earnings yield. It is the reciprocal of price-to-earnings (P/E) ratio. This ratio is quite effective for determining undervalued stocks. Also, this ratio is 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 fetch higher returns.
This ratio is effective 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 said to be undervalued in comparison to bonds. This implies that investing in the stock market is a better option for a value investor.
However, while T-bills are free from risks, investing in stocks always carries some inherent risks. Hence, it will 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Here are five of the 59 stocks that made it through the screen:
Headquartered in Oregon, Lithia Motors LAD is one of the leading automotive retailers of new and used vehicles, and related services in the United States. Apart from a wide range of new and used vehicles, the company offers finance and insurance products, and automotive repair and maintenance. It has a Zacks Rank #1 and an expected EPS growth rate of 9.2% for the next 3-5 years.
Based in Los Angeles, CA, KB Home KBH is a well-known homebuilder in the United States and one of the largest in the state. The company is involved in building and designing homes that cater to first time, move-up and active adult homebuyers on acquired or developed lands. It has a Zacks Rank #1 and an expected EPS growth rate of 9.3% for the next 3-5 years.
Illinois-based Anixter International Inc. AXE is a leading global distributor of network & security solutions, electrical & electronic Solutions and utility power solutions. They help build, connect, protect and power valuable assets and critical infrastructures. It has a Zacks Rank #1 and an expected EPS growth rate of 8% for the next 3-5 years.
Wilmington DE-based Navient Corporation NAVI is a loan management, servicing and asset recovery company.Navient is one of the four large servicers to U.S. Department of Education under its Direct Student Loan Program. The firm has a Zacks Rank #1 and an expected EPS growth rate of 25% for the next 3-5 years.
Dublin, Ireland-based Jazz Pharmaceuticals JAZZ is a specialty biopharmaceutical company with a focus on areas like sleep and hematology/oncology. It has a Zacks Rank #2 and an expected EPS growth rate of 9% 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.
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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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Lithia Motors, Inc. (LAD) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
Anixter International Inc. (AXE) : Free Stock Analysis Report
Navient Corporation (NAVI) : Free Stock Analysis Report
Jazz Pharmaceuticals PLC (JAZZ) : Free Stock Analysis Report
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