For investors wanting to gain exposure to stocks as well as bonds, a simple yet effective measure 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 apt.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. Stocks with higher earnings yield are expected to offer better returns.
Earnings yield may also be used to compare the performance of a market index with the 10-year Treasury yield. The market index is considered 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 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 50 stocks that made it through the screen:
Western Digital Corporation WDC: Headquartered in California, Western Digital is one of the largest hard disk drive producers in the United States. The firm is well poised to benefit from the momentum in the solid-state drive market, flash solutions in the gaming vertical and cloud-based solutions. The company currently has a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2022 sales and earnings implies year-over-year growth of 18.7% and 142.3%, respectively.
Diamondback Energy Inc. FANG: Texas-headquartered Diamondback is an oil and gas explorer, with primary focus on the Permian Basin. The purchases of Energen and Ajax Resources have transformed Diamondback, which presently has a Zacks Rank #1 — into one of the leading Permian Basin oil producers. The recent buyout of QEP Resources further boosted Diamondback’s portfolio. The consensus estimate for sales and earnings for the current year implies year-over-year growth of 69% and 159%, respectively.
Wells Fargo & Company WFC: San Francisco-based Wells Fargo & Company is one of the largest financial services companies in the United States. Wells Fargo continues to benefit from deposit growth, lower costs, strong capital position and improving credit quality. Also, restructuring moves are likely to support the company's growth strategy. It currently sports a Zacks Rank #1 and has a long-term expected EPS growth rate of 9.7%.
Huntsman Corporation HUN: Texas-based Huntsman is among the world's largest manufacturers of differentiated and commodity chemical products. It is well placed to gain from its actions to boost downstream businesses. Strategic buyouts including Icynene-Lapolla, Gabriel Performance Products and Demilec are expected to offer it with significant synergies. This Zacks Rank #2 company remains committed to reduce debt using strong cash flows. The consensus estimate for sales and earnings for the current year implies year-over-year growth of 18.4% and 125.5 %, respectively.
Pilgrim’s Pride Corporation PPC: This Colorado-based company is engaged in the processing, production, marketing and distribution of frozen, fresh as well as value-added chicken products. Pilgrim’s Pride continues to gain from strength in European and Mexican operations. The company’s consistent efforts to strengthen competitive position through innovations bode well. The robust product portfolio strategy, operational endeavors and Key Customer strategy are driving the firm. This Zacks Rank #2 company has a long-term expected EPS growth rate of 24.1%.
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.
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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Wells Fargo & Company (WFC): Free Stock Analysis Report
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Diamondback Energy, Inc. (FANG): Free Stock Analysis Report
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