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 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 55 stocks that made it through the screen:
TEGNA Inc. TGNA: Headquartered in McLean, VA, TEGNA is a media company offering high-quality television programming and digital content. It sports a Zacks Rank #1 and has an expected EPS growth rate of 10% for the next 3-5 years.
Genesco Inc. GCO: Nashville-based specialty retailer, Genesco sells footwear, headwear and accessories in retail stores in the United States and Canada.It sports a Zacks Rank #1 and has an expected EPS growth rate of 5% for the next 3-5 years.
Devon Energy Corporation DVN: Based in Oklahoma, Devon is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas. It carries a Zacks Rank #2 and has an expected EPS growth rate of 11.7% for the next 3-5 years.
Credit Suisse Group CS: Credit Suisse offers investment products, private banking and financial advisory services, as well as insurance and pension solutions. It sports a Zacks Rank #1 and has an expected EPS growth rate of 18.4% for the next 3-5 years.
KB Home KBH: Based in Los Angeles, CA, KB Home is a well-known homebuilder in the United States and one of the largest in the state.It sports a Zacks Rank #1 and has an expected EPS growth rate of 10.9% 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.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Credit Suisse Group (CS) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
Devon Energy Corporation (DVN) : Free Stock Analysis Report
TEGNA Inc. (TGNA) : Free Stock Analysis Report
Genesco Inc. (GCO) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research