Investors always look for stocks that have good return prospects. As a result, stocks backed by strong earnings potential are preferred, as an impressive earnings report tends to augment a stock’s price. In this regard, earnings yield is a very useful tool for investors looking for stocks coming with the promise of comparatively better earnings.

Simply put, earnings yield is the inverse of the price-to-earnings (P/E) ratio. In addition to comparing a stock with others, it can be used to compare a stock with fixed income securities.

Earnings yield is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with the higher earnings yield has the potential to provide comparatively greater returns.

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 as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.

However, keeping in mind the risk-free nature of T-bills, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the stock market.

The Winning Strategy

We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for selecting 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 $5.00.

Buy-Rated Stocks: Stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have been 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.

Here are four of the 10 stocks that made it through the screen:

Tower International, Inc. (TOWR -Snapshot Report) is engaged in the manufacture of engineered structural metal components and assemblies primarily serving automotive original equipment manufacturers. The company carries a Zacks Rank #2. Its expected EPS growth rate for 3–5 years is 10%.

Ternium S.A. (TX - Snapshot Report) is the leading producer of flat and long steel products in Latin America. It consolidates the operations of steel companies Hylsa in Mexico, Siderar in Argentina and Sidor in Venezuela. The company carries a Zacks Rank #2 and its expected EPS growth rate for the next 3–5 years is 25.7%.

ARRIS International plc (ARRS - Analyst Report) is a global technology leader in the development of advanced cable telephony, next-generation high-speed data network, demand-driven video solutions, operations software, and broadband access equipment. This Zacks Rank #1 company has an expected EPS growth rate of 17.6% for the next 3–5 years.

Korea Electric Power Corp. (KEP - Analyst Report) is an integrated electric utility engaged in the generation, transmission, distribution of electricity and development of electric power resources in South Korea. This Zacks Rank #2 stock has an expected EPS growth rate of 25% for the next 3–5 years.