If you have doubts whether to invest your money in stocks or bonds, one important financial parameter that can show you the right direction is earnings yield. It is the reciprocal of the price-to-earnings (P/E) ratio. This ratio can be successfully used for finding out undervalued stocks. Also, this ratio can be utilized for comparing stocks with the market or fixed income securities.

Earnings yield can be calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one which fetches high earnings yield should provide higher returns.

This ratio can be used for comparing the performance of the market with the 10-year Treasury yield. When the yield of the market index is higher than the 10-year Treasury yield, stocks can be viewed as undervalued in comparison to bonds. This means that investing in the stock market is a better choice for a value investor.

However, while T-bills are free of risks, investing in stocks always involves some inherent risks. Hence, it would be wise 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 21 stocks that made it through the screen:

Lafayette, IN-based Wabash National Corporation (WNC - Free Report) is a leading manufacturer of semi-trailers in North America. It has a Zacks Rank #1 and an expected EPS growth rate of 21.5% for the next 3–5 years.

Brentwood, TN-headquartered Delek US Holdings, Inc. (DK - Free Report) is an independent refiner, transporter, and marketer of petroleum products. It has a Zacks Rank #1 and an expected EPS growth rate of 10% for the next 3–5 years.

Hamilton, Bermuda-based Triton International Limited (TRTN - Free Report) offers acquisition, leasing, re-leasing, and sale of intermodal containers. It has a Zacks Rank #2 and an expected EPS growth rate of 10% for the next 3–5 years.

Tucker, GA-based GMS Inc. (GMS- Free Report) is a distributor of wallboard and suspended ceilings systems. It has a Zacks Rank #1 and an expected EPS growth rate of 7% for the next 3–5 years.