Zacks
5 Value Stocks With Strong Earnings Yield to Rev Up Returns
Rimmi Singhi
6 min read

In This Article:

In the realm of investment strategies, a tried-and-true approach is value investing, which involves identifying stocks trading below their intrinsic value. This method is rooted in the belief that the market often misjudges stock prices in the short term.

Value investing adopts a long-term perspective, evaluating companies based on fundamental strength, earnings potential and financials to determine their intrinsic value. The goal is to profit by investing in stocks that seem undervalued, eventually yielding substantial returns as the stock price aligns with its intrinsic value, reflecting the actual fundamentals.

While the P/E ratio is a common metric for selecting undervalued stocks with significant upside potential, another intriguing ratio in the arsenal of value investors is earnings yield. This metric serves as a crucial indicator, aiding investors in discerning whether a stock is a hidden gem or a potential financial pitfall.

Investors can explore high earnings yield stocks like GigaCloud Technology Inc. GCT, SkyWest SKYW, Ramaco Resources Inc. METC, Eastman Chemical Company EMN and Catalyst Pharmaceuticals, Inc. CPRX to potentially secure attractive long-term rewards.

Calculated as annual earnings per share (EPS) divided by market price, this percentage metric gauges the anticipated yield from earnings for each invested dollar in a stock. When comparing similar stocks, those with higher earnings yield are perceived as undervalued, while lower earnings yield indicates overpricing.

Although earnings yield is essentially the reciprocal of the P/E ratio, it provides additional insight by facilitating comparisons with fixed-income securities. Investors often juxtapose a stock's earnings yield with prevailing interest rates, such as the current 10-year Treasury yield, to assess its return on investment relative to nearly risk-free returns. If a stock's yield is lower than the 10-year Treasury yield, it is deemed overvalued compared to bonds. Conversely, a higher stock yield suggests undervaluation, making investing in the stock market a preferable choice for a value investor in such a scenario.

By incorporating earnings yield into their investment strategy, value investors can uncover hidden opportunities and strategically position themselves for success in the dynamic market environment.

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:

Terms and Privacy Policy
Your Privacy Choices
Utah Privacy Notice
More Info

Recommended Stories