The Federal Reserve left interest rates unchanged at 3.5%-3.75% following its latest FOMC meeting, marking the fifth straight policy meeting without a rate change since the December cut. Although the decision was largely expected, markets remain concerned that the Fed may be moving too cautiously as inflation risks persist.
At the same time, geopolitical tensions continue to cloud the outlook. The conflict between the United States and Iran has intensified, with fresh strikes and counterstrikes raising fears of a broader regional escalation. These developments have also kept oil prices volatile, adding to inflationary pressures and market uncertainty.
In such an unpredictable environment, focusing on fundamentally strong, attractively valued stocks remains a sensible long-term investment strategy.
One of the most common valuation metrics to pick undervalued stocks with solid upside potential is the P/E ratio. However, there’s another interesting ratio that you can consider for ferreting out attractively valued stocks. And that is earnings yield.
One could invest in high earnings yield stocks like Arrow Electronics Inc. ARW, PENN Entertainment, Inc. PENN, Canada Goose Holdings Inc. GOOS and Harmony Biosciences Holdings HRMY to fetch handsome long-term rewards.
Earnings Yield Strength
Earnings yield is useful for investors concerned about the rate of return on investment. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price. This metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today. While comparing stocks, if other factors are similar, the ones with higher earnings yield are considered undervalued, while those with lower earnings yield are seen as overpriced.
While earnings yield is nothing but the reciprocal of the P/E ratio, it is a little more illuminating than the traditional P/E ratio, as it also facilitates the comparison of stocks with fixed-income securities. Investors often compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a stock is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.
The Winning Strategy
We have set an 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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Picks
Here we highlight four of the 36 stocks that qualified the screening:
Arrow Electronics is one of the world’s largest distributors of electronic components and enterprise computing products.The Zacks Consensus Estimate for ARW’s 2026 and 2027 EPS implies year-over-year growth of 74% and 4%, respectively. EPS estimates for the current year and the next have moved up by $5.56 and $4.31, respectively, over the past 90 days. Arrow Electronics currently sports a Zacks Rank #1 and has a Value Score of A.
PENN Entertainment operates gaming and racing facilities, along with video gaming terminal operations, with a strong focus on slot-machine entertainment. The Zacks Consensus Estimate for PENN’s 2026 and 2027 EPS implies year-over-year growth of 123% and 65%, respectively. EPS estimates for the current year and the next have moved up by 11 cents and 41 cents, respectively, over the past 30 days. PENN Entertainment currently sports a Zacks Rank #1 and has a Value Score of A.
Canada Goose is a designer, manufacturer, distributor and retailer of premium outerwear for men, women and children. The Zacks Consensus Estimate for GOOS’ 2026 and 2027 EPS implies year-over-year growth of 59% and 13.5%, respectively. EPS estimates for the current year and the next have moved up by 4 cents and 6 cents, respectively, over the past 30 days. Canada Goose currently sports a Zacks Rank #1 and has a Value Score of A.
Harmony Biosciences is a neuroscience company developing and commercializing therapies for sleep/wake disorders and rare neurological diseases. The Zacks Consensus Estimate for HRMY’s 2026 and 2027 EPS implies year-over-year growth of 22% and 17%, respectively. EPS estimates for the current year and the next have moved up by 10 cents and 23 cents, respectively, over the past 30 days. Harmony Biosciences currently sports a Zacks Rank #1 and has a Value Score of A.
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Arrow Electronics, Inc. (ARW): Free Stock Analysis Report
PENN Entertainment, Inc. (PENN): Free Stock Analysis Report
Canada Goose Holdings Inc. (GOOS): Free Stock Analysis Report
Harmony Biosciences Holdings, Inc. (HRMY): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).