If you are not sure about whether to invest your money in bonds or stocks, an important parameter that can show you the right direction is earnings yield. It is the inverse of the price-to-earnings (P/E) ratio. This ratio comes handy for pinpointing undervalued stocks. Also, this ratio is useful for comparing stocks with the market or fixed income securities.

Earnings yield can be computed as (annual earnings per share/market price) x 100. While comparing similar stocks, the one with high earnings yield should fetch higher returns.

This ratio is useful for comparing the performance of the market with the 10-year Treasury yield. When the yield of the market index exceeds the 10-year Treasury yield, stocks can be said to be undervalued in comparison to bonds. This means that investing in the stock market is a better option for a value investor.

However, while T-bills are free of risks, investing in stocks always carries some inherent risks. Hence, it will be prudent to add a risk premium to the Treasury yield while comparing with the earnings yield of a stock or the broader market.

The Winning Strategy

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 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.

Here are four of the 44 stocks that made it through the screen:

Providence, RI-based Citizens Financial Group, Inc. (CFG - Free Report) is a retail bank holding company. It has a Zacks Rank #2 and an expected EPS growth rate of 15.5% for the next 3-5 years.

Woodlands, TX-based Nexeo Solutions, Inc. (NXEO - Free Report) distributes chemicals and plastics products. It has a Zacks Rank #1 and an expected EPS growth rate of 30.6% for the next 3-5 years.

Fort Mill, SC-based Domtar Corporation (UFS - Free Report) is a provider of fiber-based products including communication, specialty and packaging papers, market pulp and absorbent hygiene products. It has a Zacks Rank #2 and an expected EPS growth rate of 5% for the next 3-5 years.

Houston, TX-based KBR, Inc. (KBR - Free Report) is a leading global engineering, construction, and services company, supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power, and industrial markets. It has a Zacks Rank #2 and an expected EPS growth rate of 10.6% for the next 3-5 years.