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Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand on the more commonly used P/E ratio as it facilitates comparison of stocks with fixed income securities. Interestingly, it is simply the inverse of the P/E ratio.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater 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 this situation, investing in the stock market would be a better option for a value investor.
However, bearing in mind the risk-free nature of T-bills, 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 stock market.
Screening Parameters
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.
Here are five of the 60 stocks that made it through the screen:
La-Z-Boy Incorporated (LZB - Free Report) : Headquartered in Michigan, La-Z-Boy is the manufacturer of upholstered recliners and other furniture. The stock currently sports a Zacks Rank #1.The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings suggests year-over-year growth of 6.5% and 17.6%, respectively.
Select Medical Holdings (SEM - Free Report) : This Pennsylvania-based healthcare services provider offers long-term care for critically ill patients. This Zacks Rank #1 stock provides rehabilitation therapy and recovery services to patients suffering from trauma, as well as other serious conditions. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 8.9% and 24.8%, respectively.
Ultra Clean Holdings, Inc. (UCTT - Free Report) : Headquartered in California, Ultra Clean is a developer and supplier of critical subsystems for the semiconductor capital equipment industry. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 165.9% and 3.3%, respectively.
360 Finance, Inc. (QFIN - Free Report) : China-based 360 Finance offers a digital consumer finance platform. This Zacks Rank #1 stock provides online consumer finance products to prime, underserved borrowers funded primarily by its funding partners. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 6.1% and 29.7%, respectively.
Berry Global Group, Inc. (BERY - Free Report) : Based in Evansville, Berry Global produces and markets plastic packaging products. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 32.3% and 14.1%, respectively.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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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5 Must-Buy Stocks Offering High Earnings Yield
Earnings yield is a useful ratio for investors who have exposure to both stocks and bonds. This ratio gains an upper hand on the more commonly used P/E ratio as it facilitates comparison of stocks with fixed income securities. Interestingly, it is simply the inverse of the P/E ratio.
Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater 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 this situation, investing in the stock market would be a better option for a value investor.
However, bearing in mind the risk-free nature of T-bills, 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 stock market.
Screening Parameters
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 peers in any type of market environment. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Picks
Here are five of the 60 stocks that made it through the screen:
La-Z-Boy Incorporated (LZB - Free Report) : Headquartered in Michigan, La-Z-Boy is the manufacturer of upholstered recliners and other furniture. The stock currently sports a Zacks Rank #1.The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings suggests year-over-year growth of 6.5% and 17.6%, respectively.
Select Medical Holdings (SEM - Free Report) : This Pennsylvania-based healthcare services provider offers long-term care for critically ill patients. This Zacks Rank #1 stock provides rehabilitation therapy and recovery services to patients suffering from trauma, as well as other serious conditions. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 8.9% and 24.8%, respectively.
Ultra Clean Holdings, Inc. (UCTT - Free Report) : Headquartered in California, Ultra Clean is a developer and supplier of critical subsystems for the semiconductor capital equipment industry. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 165.9% and 3.3%, respectively.
360 Finance, Inc. (QFIN - Free Report) : China-based 360 Finance offers a digital consumer finance platform. This Zacks Rank #1 stock provides online consumer finance products to prime, underserved borrowers funded primarily by its funding partners. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 6.1% and 29.7%, respectively.
Berry Global Group, Inc. (BERY - Free Report) : Based in Evansville, Berry Global produces and markets plastic packaging products. The stock currently sports a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2020 and 2021 earnings suggests year-over-year growth of 32.3% and 14.1%, respectively.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.
Click here to sign up for a free trial to the Research Wizard today.
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