Investors often use P/E ratio and other valuation metrics to pick undervalued stocks with solid upside potential. However, one can also use another interesting ratio. Earnings yield, expressed in percentage, is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing stocks, if other factors are similar, investors can look out for the one with higher earnings yield. This is because stocks with earnings yield have the potential to provide comparatively greater returns.
You must have heard of dividend yield (Dividend per share/ Market Price), which is one of the standard metrics for valuing stocks. If we substitute dividend per share with earnings per share, we get the earnings yield. Just like the case with dividend yield, firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Notably, earnings yield captures both the tangible and intangible yield of the firm, as opposed to dividend yield, which only takes into account the tangible yield. The ratio of dividend yield to earnings yield indicates the proportion of earnings directly distributed in the form of dividend payout.
Importantly, earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
Earnings Yield: Simply the Inverse of P/E
Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics i.e. the P/E ratio (stock price/earnings per share). Thus, a firm having a P/E ratio of 10.2 will logically have an earnings yield of 9.8% (100/10.2). In fact, as the concept of earnings yield is already indirectly captured in the P/E ratio, earnings yield as an investment valuation metric is not as widely used as the P/E ratio.
Having said that, it should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio as the former facilitates comparison of stocks with fixed-income securities.
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 of generating 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 their 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 49 stocks that made it through the screen:
Chembio Diagnostics, Inc. CEMI: This New York-based firm develops diagnostic solutions and offers products for the treatment of malaria, ebola, febrile illness, dengue fever, and influenza, et al. The stock currently carries a Zacks Rank #2 and has an expected EPS growth rate of 25% for the next three-five years.
B2Gold Corp. BTG: Vancouver-based B2Gold Corp. is a gold producer with three operational mines — one each in Mali, Namibia, Philippines. This Zacks Rank #2 company has an expected EPS growth rate of 16.3% for the next three-five years.
Comstock Resources, Inc. CRK: This Texas-based oil and gas exploration company currently carries a Zacks Rank #2. The consensus mark for 2021 earnings is currently pegged at 86 cents per share, which suggests year-over-year growth of 95.5%.
Donnelley Financial Solutions Inc. DFIN: Headquartered in Chicago, this Zacks Rank #1 firm provides software and services. It enables content creation, management and distribution, as well as provides data analytics and multi-lingual localization services. The consensus mark for 2020 and 2021 earnings suggests year-over-year growth of 39.3% and 11%, respectively.
Kinross Gold Corporation KGC: Based in Ontario, the firm is primarily involved in the exploration and operation of gold mines. Earnings of Kinross are estimated to grow 61.7% in 2020.
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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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Comstock Resources, Inc. (CRK) : Free Stock Analysis Report
Chembio Diagnostics, Inc. (CEMI) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
B2Gold Corp (BTG) : Free Stock Analysis Report
Donnelley Financial Solutions Inc. (DFIN) : Free Stock Analysis Report
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