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 60 stocks that made it through the screen:
Koppers Holdings Inc. KOP: Based in Pennsylvania, Koppers Holdings is an integrated global provider of treated wood products, wood treatment chemicals and carbon compounds. It has a Zacks Rank #1 and an expected EPS growth rate of 18.00% for the next 3-5 years.
Alaska Air Group ALK: Based in Washington, Alaska Air is an airline holding company, serving more than 100 cities across North America. The carrier’s mainline operating fleet includes multiple B737 and Airbus A320 family jets. It has a Zacks Rank #2 and an expected EPS growth rate of 19.91% for the next 3-5 years.
Based in L.A. Guess? GES designs, markets, distributes and licenses casual apparel and accessories for men, women and children per American lifestyle and European fashion sensibilities. It has a Zacks Rank #1 and an expected EPS growth rate of 17.5% for the next 3-5 years.
Headquartered in Santa Monica, CA, Lionsgate LGF.A is a film studio, which produces and distributes motion pictures for theatrical as well as straight-to-video release, and television programming. It has a Zacks Rank #2 and an expected EPS growth rate of 15.00% 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 6.04% 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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Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
Koppers Holdings Inc. (KOP) : Free Stock Analysis Report
Jazz Pharmaceuticals PLC (JAZZ) : Free Stock Analysis Report
Lions Gate Entertainment Corp. (LGF.A) : Free Stock Analysis Report
Guess?, Inc. (GES) : Free Stock Analysis Report
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