Investors frequently use P/E ratio and other valuation indicators to identify stocks that are potentially undervalued and offer strong growth prospects. Another intriguing ratio that can be employed is the earnings yield.
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 stocks with higher earnings yield. This is because stocks with higher earnings yield have the potential to provide comparatively greater returns.
Commercial Vehicle Group CVGI, Urban Outfitters Inc. URBN, Mr. Cooper Group Inc. COOP, DMC Global Inc. BOOM and GigaCloud Technology Inc. GCT are some stocks boasting high 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. Earnings yield captures both the tangible and intangible yield of a firm, as opposed to dividend yield, which only takes into account the tangible yield.
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 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). 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 the comparison of stocks with fixed-income securities.
The Winning Strategy
We have set an 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.
Our Picks
Here we discuss five of the 24 stocks that qualified the screen:
Commercial Vehicle supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market, the construction market and other specialized transportation markets. The Zacks Consensus Estimate for CVGI’s 2023 and 2024 earnings implies year-over-year growth of 102% and 12%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 8 cents and 6 cents, respectively, over the past 30 days. Commercial Vehicle currently sports a Zacks Rank #1 and has a Value Score of A.
Urban Outfitters is a lifestyle specialty retailer that offers fashion apparel and accessories, footwear, home décor and gift products. The Zacks Consensus Estimate for URBN’s fiscal 2024 and 2025 earnings implies year-over-year growth of 82% and 6%, respectively. Estimates for fiscal 2024 and 2025 earnings per share have moved up by 38 cents each over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Mr. Cooper provides quality servicing, origination and transaction-based services principally to single-family residences, primarily in the United States. The Zacks Consensus Estimate for COOP’s 2023 and 2024 earnings implies year-over-year growth of 174.8% and 30%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 99 cents and $1.32, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
DMC Global is a leading worldwide provider of engineered products used for construction, energy, industrial processing and transportation markets. The Zacks Consensus Estimate for BOOM’s 2023 and 2024 earnings implies year-over-year growth of 200% and 26%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 24 cents and 25 cents, respectively, over the past 30 days. DMC Global currently sports a Zacks Rank #1 and has a Value Score of A.
GigaCloud Technology provides end-to-end B2B e-commerce solutions for big parcel merchandise worldwide. The Zacks Consensus Estimate for GCT’s 2023 and 2024 earnings implies year-over-year growth of 165% and 6.3%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 20 cents and 12 cents, respectively, over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Urban Outfitters, Inc. (URBN): Free Stock Analysis Report
Commercial Vehicle Group, Inc. (CVGI): Free Stock Analysis Report
DMC Global (BOOM): Free Stock Analysis Report
MR. COOPER GROUP INC (COOP): Free Stock Analysis Report
GigaCloud Technology Inc. (GCT): Free Stock Analysis Report
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This article originally appeared on Zacks
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