For investors wanting to gain exposure to stocks as well as bonds, a simple yet effective metric to use is earnings yield. The ratio is an inverse of the price-to-earnings (P/E) ratio, which is usually utilized to find undervalued stocks. However, for the comparison of stocks with fixed income securities or the market at large, earnings yield may prove to be more appropriate.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. Stocks with higher earnings yield are likely to offer better returns.
Earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. The market index is deemed undervalued compared to the 10-year Treasury bill when market yield is higher than that of bond. In such a situation, value investors may choose to invest in the stock market rather than the 10-year Treasury bill.
However, investors must remember that T-bills are risk free, while stock investments come with a caveat. Thus, it would be a good idea to add a risk premium to the Treasury yield while comparing it with 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.
Here are three of the seven stocks that made it through the screen:
Tech Data Corporation (NASDAQ:TECD) is a leading provider of Internet technology products, logistics management and other value-added services. The company sports a Zacks Rank #1 and its expected EPS growth rate for the next 3–5 years is 22.8%.
POSCO (NYSE:PKX) manufactures hot and cold rolled steel products, heavy plate and other steel products for construction and shipbuilding industries. The company holds a Zacks Rank #2 and its expected EPS growth rate for the next 3–5 years is 5%.You can see the complete list of today’s Zacks #1 Rank stocks here.
United States Steel Corporation (NYSE:X) manufactures and sells a variety of steel mill products, coke and taconite pellets. This Zacks Rank #1 company has an expected EPS growth rate of 8% 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.
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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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Tech Data Corporation (TECD): Free Stock Analysis Report
POSCO (PKX): Free Stock Analysis Report
United States Steel Corporation (X): Free Stock Analysis Report
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