Earnings Yield is a simple yet effective ratio for investors in stocks or bonds. It is the inverse of the price-to-earnings (P/E) ratio, which is often used to handpick undervalued stocks. However, one limitation of the P/E ratio is that it cannot be used to compare stocks with fixed income securities.
This is where the Earnings Yield gains the upper hand. It is calculated as (Annual Earnings per Share/Market Price) x 100.
Earnings Yield can be used to compare a stock with other stocks as well as with fixed income securities. While comparing similar stocks, the one with the higher earnings yield should provide better returns.
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 such a situation, a value investor would prefer to invest in stocks. However, given the risk-free nature of T-bills, it would be prudent to add a risk premium to their yield while comparing with a stock or the market index.
The Winning Strategy
We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for selecting 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 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 $5.00.
Zacks Rank less than 3: Stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) generally outperform their peers in any type of market environment.
Here are five of the 11 stocks that made it through the screen:
Korea Electric Power Corp. (
Orchid Island Capital, Inc. (
Trinseo SA (
Aegean Marine Petroleum Network Inc. (
CVR Refining, LP (
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.
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