There are some key parameters in the world of finance. For instance, in some situations, investors may be baffled whether to invest their money in stocks or bonds. In such cases, carefully selected financial metrics can show the right direction to investors. One such key parameter is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. In fact, this ratio can be effectively utilized for spotting undervalued stocks. It is also very handy for making a comparative analysis with the market or fixed income securities.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. This is very useful for comparing stocks coming from the same sector or industry. The stock with higher earnings yield is likely to generate better returns.
This ratio can also be utilized for comparing the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, the stocks can be considered as undervalued in comparison to bonds. This indicates that investing in the stock market is a better option for a value investor.
Treasury-bills investment is free of risks. However, investing in stocks has always some risks associated with it. Hence, it is an excellent idea to add a risk premium to 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 8% 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:
Volkswagen AGVLKAY is a leading automobile manufacturer in Europe. It has a Zacks Rank #2 and an expected EPS growth rate of 12.9% for the next 3-5 years.
San Francisco, CA-based CAI International, Inc.CAI is a leading transportation finance and logistics company. It has a Zacks Rank #2 and an expected EPS growth rate of 8% for the next 3-5 years.
Irvine, CA-based TRI Pointe Group, Inc.TPH is a leading public homebuilder in the United States. It has a Zacks Rank #1 and an expected EPS growth rate of 11% for the next 3-5 years.
Dallas, TX-based Kronos Worldwide, Inc.KRO is a producer of titanium dioxide products. It has a Zacks Rank #2 and an expected EPS growth rate of 5% 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.
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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