CHICAGO, Dec. 12, 2012 /PRNewswire/ -- Stocks in this week's article include: The Blackstone Group LP (NYSE: BX), Marathon Petroleum Corp. (NYSE: MPC), RLJ Lodging Trust (NYSE: RLJ), United Rentals, Inc. (NYSE: URI) and Valeant Pharmaceuticals Intl, Inc. (NYSE: VRX). Kevin Matras talks about a stock's Earnings Yield and how to use it.Kevin Matras of Zacks Investment Research: A stock's Earnings Yield measures just that, the anticipated yield (or return) an investment in a stock could give you based on the earnings and the price paid for the stock.
The most common way people will use this ratio is to compare it to other stocks and to compare the yields to the 10 Year T-Bill.
Conventional wisdom has it that if the yield on the stock market (S&P 500 for example) is lower than the yield on the 10 Year Treasury, then stocks might be considered overvalued. If the yield on the S&P 500 is greater than the 10 Year T-Bill, stocks would be considered undervalued.
The theory behind this is that Bonds and Stocks are competing for investors' dollars. And to attract investment interest in stocks, a higher yield needs to be paid to the stock investor for the extra risk he's assuming compared to the virtual risk-free investment offered in US backed Treasuries.
If earnings go up, the yield goes up. If earnings go down, so does the yield.
Prices also affect the yield, but they move inversely. If Prices go up, the yield goes down. And if prices go down, the yield goes up.
Currently, the Earnings Yield for the S&P is 7.63%, compared to the 10 Year Treasury of 1.63%. So stocks are still the more attractive investment, assuming you're ok with the risk that comes along with it.
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