Price-to-earnings (P/E) ratio is often used by investors to handpick undervalued stocks. However, it is difficult to use the P/E ratio to compare stocks with fixed income securities. This is where its inverse – Earnings Yield – comes handy.

Earnings Yield is calculated as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with the higher earnings yield may provide better returns.

You can use the Earnings Yield to compare a stock with other stocks and with fixed income securities. It can also be used to compare the overall 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 such a situation, a value investor would prefer the stock market. However, the risk-free nature of T-bills makes it necessary to add a risk premium to their yield while making comparisons with a stock or the overall market.

Screening Criteria

We have set Earnings Yield greater than 10% as our primary screening criteria, but it alone cannot be used for selecting stocks that have the potential to generate solid returns. So, we have added the following parameters:

Estimated EPS growth for the next 12 months greater than 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.

Zacks Rank less than 3: Stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) generally outperform than their peers in any type of market environment.

VGM Score less than or equal to B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with Zacks Rank #1 or 2 offer the best upside potential.

Here are five of the 15 stocks that qualified the screening:

Fiat Chrysler Automobiles N.V. (FCAU- Snapshot Report)

Transocean Partners LLC (RIGP -Snapshot Report)

Mallinckrodt Public Limited Company (MNK - Analyst Report)

Radian Group Inc. (RDN - Analyst Report)

Owens-Illinois, Inc. (OI - Analyst Report)