VInvesting is all about finding stocks that are currently priced below their intrinsic value. But how do value investors uncover these hidden gems? Many prefer price-to-earnings (P/E) and price-to-sell (P/S) ratios to identify low-priced stocks with exceptional returns. There is another interesting ratio that you can consider to find attractively valued stocks. And that’s the earnings yield, which is nothing but the inverse of the P/E ratio, although a bit more illuminating than the traditional P/E ratio.
Earnings yield is measured as (annual earnings per share/market price) x 100. When comparing similar stocks, the one with the highest earnings yield is more likely to provide better returns, other factors remaining constants. Marathon Oil Corporation MRO, Nutrien Limited RNT, Electronic Arrow Inc. ARW, Micron Technology UM and Teak Resources Limited TEAK could be good bets if you’re looking for high-yield picks.
Earnings yield has an advantage over the P/E ratio because the former makes it easier to compare equities with fixed income securities. Investors often compare a stock’s earnings yield to prevailing interest rates, such as the current 10-year Treasury yield, to get an idea of the return on investment it offers compared to virtually risk-free returns. .
If a stock’s yield is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the stock’s yield is higher, it will be considered undervalued. In this situation, investing in the stock market would be a better option for a value-oriented investor.
It’s important to remember that treasury bills are risk-free, while equity investments come with a caveat. It would be a good idea to add a risk premium to the Treasury yield while comparing it to a stock’s earnings yield or the broader market.
The winning strategy
We put Yield greater than 10% as the primary selection criterion, but it alone cannot be used to select stocks that have the potential to generate strong returns. We have therefore 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 measure compares estimated 12-month forward EPS with actual 12-month EPS.
Average daily volume (20 days) greater than or equal to 100,000: A high trading volume implies that a stock has adequate liquidity.
Current price greater than or equal to $5.
Shares listed for purchase: Stocks with a Zacks ranking of #1 (strong buy) or 2 (buy) are known to outperform their peers in any type of market environment. You can see the full list of today’s Zacks #1 Rank stocks here.
Here are four of the 123 stocks that crossed the screen:
Nutrien: Based in Canada, Nutrien is a leading supplier of agricultural inputs and services. The company is benefiting from strong demand and higher prices for crop nutrients thanks to strong global agricultural markets. NTR is also benefiting from acquisitions, profitability and increased adoption of its digital platform. The company continues to expand its presence in Brazil through acquisitions, including Tec Agro.
Nutrien currently sports a Zacks rank #1 (Strong Buy). It has an expected profit growth rate of 106.4% for the current year. Zacks’ consensus estimate for NTR’s revenue for the current year is up 37.8% over the past 60 days.
Marathon Oil: Texas-based Marathon Oil is a leading oil and gas exploration company. Wells drilled by Marathon Oil have extremely low oil price breakeven costs and need an oil price of only $35 per barrel to be profitable. Robust MRO operational metrics should support strong long-term cash flow. The company is targeting production of between 340,000 and 350,000 barrels of oil equivalent per day in 2022.
Marathon Oil, which currently sports a No. 1 Zacks rank, has exceeded estimates over the past four quarters, averaging 37.4%. Zacks’ consensus estimate for its 2022 earnings improved 11 cents over the past seven days to $3.23 per share, implying 106% year-over-year growth .
Electronic Arrow: Based in New York, Arrow Electronics is one of the world’s largest distributors of electronic components and business computing products. ARW’s core strength of providing best-in-class services and easy-to-acquire technologies will drive its growth in the future. The continued focus on building Internet of Things capabilities is helping the company expand into new markets and win customers.
Arrow Electronics – currently boasting a No. 1 Zacks ranking – has exceeded earnings estimates for the past four quarters, averaging 19%. Zacks’ consensus estimate for its 2022 earnings has improved 18.8% over the past 60 days to $18.48 per share, implying 19.2% year-on-year growth on the other.
Teak Resources: Based in Canada, Teck Resources is a diversified resource company engaged in mining and mining development, with business units focused on steel, coal, copper, zinc and energy. TECK is well positioned to benefit from its portfolio of world-class assets in stable jurisdictions, its ongoing cost reduction program and its innovation-driven efficiency program, RACE21.
Currently, Teck Resources sports a No. 1 Zacks rank. The company has exceeded estimates for the past four quarters, averaging 13%. Zacks’ consensus estimate for its 2022 earnings improved 7.4% over the past seven days to $7.11 per share, implying 57.3% year-on-year growth on the other.
Micron: Idaho-based Micron has established itself as one of the world’s leading providers of semiconductor memory solutions. The company sees growing demand for memory chips from cloud providers and accelerating adoption of 5G cellular networks. The growing mix of high value-added solutions, improved customer engagement and improved cost structure are also growth drivers.
Micron – which currently carries a Zacks Rank #2 – has exceeded earnings estimates for the past four quarters, averaging 5%. Zacks’ consensus estimate for its fiscal 2022 earnings improved 8 cents over the past 30 days to $9.03 per share, implying 49% year-over-year growth. the other.
Get the rest of the stocks on the list and start testing this idea and others. All of this can be done with Research Wizard stock picking and back testing software.
The research assistant is a great starting point. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your search assistant trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your findings, and see what gems come out.
Click here to sign up for a free trial of Research Assistant 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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance
Just Released: Zacks Top 10 Stocks for 2022
In addition to the investment ideas discussed above, would you like to know our top 10 picks for all of 2022?
From its creation in 2012 to 2021, the Zacks Top 10 Stocks portfolios gained an impressive +1,001.2% vs. +348.7% for the S&P 500. Now our research director has combed through 4,000 companies covered by the Zacks Ranking and selected the top 10 tickers to buy and keep. Don’t miss your chance to enter…because the sooner you do, the better your chances of winning.
See actions now >>
Click to get this free report
Marathon Oil Corporation (MRO): Free Stock Analysis Report
Micron Technology, Inc. (MU): Free Stock Analysis Report
Arrow Electronics, Inc. (ARW): Free Inventory Analysis Report
Teck Resources Ltd (TECK): Free Stock Analysis Report
Nutrien Ltd. (NTR): Free Stock Analysis Report
To read this article on Zacks.com, click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.