Earnings yield is a very useful ratio for investors keeping their money in bonds or stock. Mathematically, it is the reciprocal of the price-to-earnings (P/E) ratio and is suitable for tracking undervalued stocks. This ratio is also very helpful for investors when they want to compare stocks with the market or fixed income securities.

Earnings Yield is calculated as (Annual Earnings per Share/Market Price) x 100. It is useful for comparing a stock with other stocks as well as with fixed income securities. While comparing similar stocks, the one with higher earnings yield is likely to fetch better returns.

While comparing the performance of a market index with the 10-year Treasury yield, this ratio comes in handy. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued in comparison to bonds. This implies that investing in the stock market is a better option for a value investor.

However, while T-bills are risk free, investing in stocks always comes with a caveat. Hence, 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 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 12 stocks that made it through the screen:

Volkswagen AG (VLKAY - Free Report) is an automobile manufacturer in Europe. This Zacks Rank #1 stock has an expected EPS growth rate of 17.3% for the next 3–5 years.

Boise, ID-based Micron Technology, Inc. (MU - Free Report) is a semiconductor systems provider. It has a Zacks Rank #1 and an expected EPS growth rate of 10% for the next 3–5 years.

San Francisco, CA-based CAI International, Inc. (CAI - Free Report) is one of the world's leading intermodal freight container leasing and management companies. This Zacks Rank #1 stock has an expected EPS growth rate of 8% for the next 3–5 years.

Pohang, South Korea-based POSCO (PKX - Free Report) is engaged in manufacturing hot and cold rolled steel products, heavy plate and other steel products for the construction and shipbuilding industries. This Zacks Rank #1 stock has an expected EPS growth rate of 5% for the next 3–5 years.