Concerns surrounding coronavirus are growing with each passing day, sending the stock market into a tailspin amid apprehensions of a global economic slowdown. The no-holds-barred price war between Saudi Arabia and Russia has resulted in the collapse of crude prices, thereby aggravating the situation. Amid the gloomy backdrop, laying a wager on stocks with high earnings yield seems prudent. This is because stocks with higher earnings yield have the potential to provide comparatively greater returns.
Understanding Earnings Yield
You must have heard of dividend yield (Dividend per share/Market Price), which is one of the classic metrics for valuating stocks. If we substitute dividend per share with earnings per share, we get the 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.Notably, earnings yield captures both the tangible and intangible yield of the firm.
Firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Importantly, 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.
Earnings Yield: Simply the Inverse of P/E
Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics, i.e. the P/E ratio (stock price/earnings per share). Thus, a firm having a P/E ratio of 10.2 will logically have an earnings yield of 9.8% (100/10.2). In fact, as the concept of earnings yield is already indirectly captured in the P/E ratio, earnings yield as an investment valuation metric is not as widely used as the P/E ratio.
Having said that, it should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio, as the former facilitates comparisons of stocks with fixed-income securities.
We have set Earnings Yield greater than 10% as our primary screening criterion. However, this 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 94 stocks that made it through the screen:
Avid Technology, Inc. AVID: This company — which develops, markets, sells, and supports software, hardware, and integrated solutions for video and audio content creation, management, and distribution — currently carries a Zacks Rank #1. Avid Technology has an expected EPS growth rate of 20.4% for the next three to five years.
TEGNA Inc. TGNA: TEGNA is a media company in the United States operating television stations and radio stations that deliver television programming and digital content. It offers content and information to consumers across various platforms. The company also provides solutions for advertisers through TEGNA Marketing Solutions. The firm currently sports a Zacks Rank #1 and has an expected EPS growth rate of 10% for the next three to five years.
DaVita Inc. DVA: This Rank #1 stock is a leading provider of dialysis services in the United States to patients suffering from chronic kidney failure, also known as end stage renal disease. It operates kidney dialysis centers and provides related medical services primarily in dialysis centers and contracted hospitals across the country. DaVita has an expected EPS growth rate of 20.4% for the next three to five years.
eBay Inc. EBAY: San Jose, CA-based eBay Inc. is one of the largest online retailers in the world. This Zacks Rank #2 company’s initiatives to enhance seller experience by offering innovative seller tools, and deliver improved buyer experience via building product catalogs utilizing structured data hold promise. eBay has an expected EPS growth rate of 11.6% for the next three to five years.
Bristol-Myers Squibb Company BMY: New York-based Bristol-Myers Squibb is a one of the leading global specialty biopharmaceutical companies focused on the development of treatments targeting serious diseases. The firm currently carries a Zacks Rank #2 and has an expected EPS growth rate of 7.4% 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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eBay Inc. (EBAY) : Free Stock Analysis Report
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