Earnings yield is a very useful ratio for investors who are willing to put their money in bonds or stocks. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio is very handy in tracking undervalued stocks. It can also be used for comparing stocks with the market or fixed income securities.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. While making a comparison among stocks hailing from the same sector or industry, the one with higher earnings yield is likely to fetch better returns.
For comparing the performance of a market index with the 10-year Treasury yield, this ratio is very useful. When the yield of the market index exceeds the 10-year Treasury yield, the stocks can be treated as undervalued in comparison to bonds. This indicates that investing in the stock market is a better option for a value investor.
However, while Treasury -bills are risk free, investing in stocks always comes with a caveat. Hence, it will 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 broader market.
The Winning Strategy
We have set Earnings Yield greater than 9% 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 four of the 14 stocks that made it through the screen:
Wilmington, DE-based The Chemours Company (CC – Free Report) is involved in the chemical business. It has a Zacks Rank #1 and an expected EPS growth rate of 15.5% for the next 3–5 years.
Volkswagen AG (VLKAY – Free Report) is an automobile manufacturer in Europe. This Zacks Rank #2 stock has an expected EPS growth rate of 8.9% for the next 3–5 years.
Boise, ID-based Micron Technology, Inc. (MU – Free Report) is a semiconductor systems provider. It has a Zacks Rank #1 and an expected EPS growth rate of 10% for the next 3–5 years.
Pohang, South Korea-based POSCO (PKX – Free Report) is engaged in manufacturing hot and cold rolled steel products, heavy plate and other steel products for the construction and shipbuilding industries. This Zacks Rank #2 stock has an expected EPS growth rate of 5% for the next 3–5 years.
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