4 Strong Bets That Offer High Returns – October 20, 2021

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Investors often use the P / E ratio and other valuation metrics to choose undervalued stocks with strong upside potential. We can also use another interesting ratio. Return on earnings, expressed as a percentage, is calculated as (annual earnings per share / market price) x 100. By comparing stocks, if other factors are similar, investors may look for stocks with a higher return. This is because stocks with a higher return have the potential to provide comparatively higher returns.

Just like in the case of dividend yield, companies with higher earnings yields are considered undervalued, while those with lower earnings yields are considered overvalued. Profit return captures both the tangible and intangible return of a business as opposed to the dividend return, which only takes into account the tangible return.

It is important to note that the return on earnings can also be used to compare the performance of a market index with the yield of the 10-year Treasury. For example, when the return of the stock index is greater than the yield of the 10-year Treasury, stocks may be considered undervalued relative to bonds. In this situation, investing in the stock market would be a better option for a value investor.

Return on earnings: simply the reverse of P / E

Return on earnings is nothing more than the inverse of one of the most popular valuation metrics, which is the P / E (share price / earnings per share) ratio. Thus, a company with a P / E of 10.2 will logically have a profit return of 9.8% (100 / 10.2). In fact, since the concept of return on earnings is already indirectly factored into the P / E ratio, return on earnings as a measure of investment valuation is not as widely used as the P / E ratio.

That said, it should be noted that earnings yield is an important tool for investors exposed to both stocks and bonds. In this regard, earnings performance may be more illuminating than the traditional P / E ratio, as the former makes it easier to compare stocks to fixed income securities.

Screening parameters

We have set an earnings return above 10% as our primary selection criteria, but this alone cannot be used to select stocks that have the potential to generate strong returns. We have therefore 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 measure compares the estimated 12-month forward EPS with the actual 12-month EPS.

Average daily volume (20 days) greater than or equal to 100,000: A high volume of transactions implies that a stock has adequate liquidity.

Current price greater than or equal to $ 5.

Shares quoted for purchase: Stocks with a Zacks # 1 (strong buy) or 2 (buy) rank are known to outperform their peers in any type of market environment. You can see the full list of today’s Zacks # 1 Rank stocks here.

Our choices

Below, we’ve highlighted four of the 81 actions that crossed the screen.

Royal Dutch Shell (RDS.A Free Report): Based in the Netherlands, this integrated energy giant currently has a No.1 Zacks ranking and has an expected long-term EPS growth of 4%. The company became the largest LNG producer in the world with the takeover of BG. A strong liquidity profile, a strong generation of FCFs and the company’s investor-friendly measures are grounds for optimism. In the most recent quarterly report, Shell announced a $ 2 billion share buyback program, which reflects steadily improving earnings and cash flow. The company’s efforts to shift to a renewable energy future and achieve net zero emissions by 2050 are commendable. Zacks’ consensus estimate for 2021 sales and earnings implies year-over-year growth of 90.7% and 333.8%, respectively.

Difference (GPS Free Report): California-based Gap is one of the largest apparel companies in the United States, currently ranked Zacks Rank # 2. Gap’s flagship brand, Old Navy, remains an important long-term growth opportunity. The growing popularity of the Athleta brand, strong investments in digital marketing and an emphasis on product strategy have also yielded positive results. The company is on track with the execution of Power Plan 2023, aimed at optimizing the portfolio, expanding margins and improving cash flow. Gap’s strong financial position and its commitment to increasing shareholder value are other strengths. Zacks’ consensus estimate for FY2022 sales and earnings implies year-over-year growth of 29% and 204%, respectively.

United States Steel (X Free Report): Based in Pennsylvania, this steel producer currently holds a Zacks # 2 rank and has a VGM score of A. It enjoys strong end-market demand and higher domestic steel prices. The company is witnessing strong consumer demand and pent-up infrastructure demand. The investment in Big River Steel is also expected to increase US Steel’s earnings and generate significant synergies. Cost reduction initiatives and efforts to improve operational efficiency are expected to drive its results. Zacks’ consensus estimate for 2021 sales and earnings implies year-over-year growth of 102% and 381.8%, respectively.

Silicon motion technology (SIMO Free Report): This Taiwan-based semiconductor company is currently Zacks Rank 1 and has an expected long-term EPS growth of 8%. The company is riding a strong demand for solid-state disk controllers and eMMC and UFS controllers. The growing adoption of integrated memory controllers amid increasing smartphone sales is also a positive. The surge in PC sales triggered by online learning and the wave of work from home bodes well. New designs for PCIe Gen4 SSD controllers from NAND manufacturers also increase the prospects for Silicon Motion. Zacks’ consensus estimate for 2021 sales and earnings implies year-over-year growth of 68% and 83%, respectively.

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Disclosure: The officers, directors and / or employees of Zacks Investment Research may hold or have sold securities short and / or hold long and / or short positions in the options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document..

Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance


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