Earnings yield is useful for investors concerned about the rate of return on an investment. This metric, expressed in percentage, is calculated as annual earnings per share divided by market price — the inverse of the price-to-earnings (P/E) ratio.
While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is not as widely used as the P/E ratio as a valuation metric but investors most commonly compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on the stock is lower than the 10-year Treasury yield, the stock would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued.
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.
Our Choices
Here are five of the 29 stocks that made it through the screen:
Asbury Automotive Group, Inc. ABG: Headquartered in Duluth, Asbury is one of the largest automotive retailers in the United States. The company sports a Zacks Rank #1 at present. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 22.7%.
Vale S.A. VALE: This Brazil-based firm is one of the world’s largest mining companies. It is the world’s largest producer of iron ore, iron ore pellets and nickel. The company sports a Zacks Rank #1 at present. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 28.5%.
Sunoco LP SUN: This Texas-based refining and marketing master limited partnership carries a Zacks Rank #2. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 148.1%.
Cigna Corporation CI: Connecticut-based Cigna is an insurance company and currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 11.5%.
Bristol-Myers Squibb BMY: Bristol-Myers is one of the leading global specialty biopharmaceutical companies focused on the development of treatments targeting serious diseases. The stock currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2021 earnings suggests year-over-year growth of 19.4%.
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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