Profit yield is useful for investors who are concerned with the rate of return on an investment. This metric, expressed as a percentage, is calculated as the annual earnings per share divided by the market price – the inverse of the price / earnings ratio (P / E).
When comparing stocks, if other factors are similar, the one with the highest profit yield is considered undervalued. That’s because this metric measures the expected yield (or return) of earnings for every dollar invested in a stock today.
Earnings yield is not as widely used as the P / E ratio as a valuation metric, but investors most commonly compare earnings from a stock’s earnings to prevailing interest rates, like the current 10-year Treasury yield , to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a share is less than the yield on the 10-year Treasury, the share will be considered overvalued in relation to the securities. On the other hand, if the stock’s yield is higher, it would be considered undervalued.
Screening parameters
We define Earnings Yield greater than 10% as our main screening criterion, but it alone cannot be used to select stocks that have the potential to generate solid returns. Therefore, we add the following parameters to the screen:
Estimated EPS growth over the next 12 months greater than or equal to the S&P 500: This metric compares the 12-month EPS estimate with the actual 12-month EPS.
Average daily volume (20 days) 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.
Shares with purchase rating: Shares with a Zacks # 1 (strong buy) or 2 (buy) rating are known to outperform their peers in any type of market environment. You can see the complete list of today’s Zacks # 1 Rank stocks here.
Our choices
Below, we highlight four of the 30 actions that passed through the screen.
General Motors GM: Based in Detroit, General Motors is one of the largest automakers in the world. General Motors’ best-selling brands in America, such as Chevrolet Silverado and Equinox, along with upcoming electric vehicle (EV) launches, including GMC Hummer EV and Cadillac Lyriq EV, are expected to boost the company’s prospects. Sporting a Zacks Rank # 1, the company has an expected long-term EPS of 9.9%. Zacks’ consensus estimate for sales and profits in 2021 implies year-on-year growth of 10.2% and 23.9%, respectively.
Winnebago Industries WGO: This company is one of the leading recreational vehicle manufacturers in the United States, leveraging the strength of acquisitions, including Newmar, Grand Design and Chris-Craft. The growing free cash flow of the company Zacks Rank # 1 and the strengthening of the balance sheet allow this to consistently increase shareholder value and outperform the market. Zacks’ consensus estimate for 2021 sales and tax profits implies year-on-year growth of 36.6% and 129.5%, respectively.
Novavax Inc. NVAX: Novavax, based in Gaithersburg, is a biotechnology company involved in the development of innovative vaccines to prevent serious infectious diseases. The company’s efforts to develop the NanoFLu influenza vaccine candidate appear encouraging. Its COVID-19 vaccine program is also progressing well. The healthy finances of Zacks Rank # 1 further increase investor confidence. Zacks’ consensus estimate for sales and earnings in 2021 implies a year-on-year growth of 645.3% and 421.4%, respectively.
ArcelorMittal MT: ArcelorMittal, based in Luxembourg, is the world’s leading steel and mining company. The company continues on the right track with cost reduction actions under the Action 2020 program, which includes plans to optimize costs and increase steel shipment volumes. Zacks Rank # 1 is also focused on moving to high value-added products – including the automotive steel line – that offer growth visibility. The consensus estimate for sales and earnings in 2021 implies year-on-year growth of 5.4% and 279%, respectively.
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Disclosure: Directors, officers and / or employees of Zacks Investment Research may own or have sold short and / or hold long and / or short positions in the options mentioned in this material. An affiliated investment advisory firm may own or have sold short and / or hold long and / or short positions in options mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance
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General Motors Company (GM): Free Stock Analysis Report
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Winnebago Industries, Inc. (WGO): Free Stock Analysis Report
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