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James Li
James Li
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4 Peter Lynch Companies With High Greenblatt Earnings Yields

Stocks also have strong cash-to-debt ratios over past five years

September 18, 2020 | About:

According to the All-in-One Screener, four stocks trading below the Peter Lynch earnings line with a high Joel Greenblatt (Trades, Portfolio) earnings yield are Caledonia Mining Corp. PLC (CMCL), Industrias Bachoco SAB de CV (NYSE:IBA), Miller Industries Inc. (NYSE:MLR) and NetApp Inc. (NASDAQ:NTAP).

All-in-One Screener gets new "efficiency rank" feature

According to the new feature announcement, GuruFocus investigated the correlations between a stock filter and trailing 12-month stock returns and identified the filters with the strongest positive correlation. Figure 1 gives a snap shot of the Screener's "Valuation Ratio" tab.

Figure 1

As Figure 1 illustrates, the green thumbs up indicates the Screener filter has an efficiency rank of at least 5, indicating a strong correlation between the filter and the stock's return over the past 12 months. Examples include the price-earnings ratio and the Greenblatt earnings yield ratio, with efficiency ranks of 6 and 10.

Legendary value investor Peter Lynch, who managed the Fidelity Magellan Fund during the 1980s, developed a simple rule to measure a stock's valuation. The investor set his earnings line at 15 times earnings, i.e., a stock is undervalued if the price-earnings ratio is less than 15.

Greenblatt, manager of Gotham Asset Management, defined earnings yield different from the inverse of the price-earnings ratio. Instead, the developer of the "Magic Formula" defined earnings yield as the ratio of Ebit to enterprise value. Greenblatt sought stocks with high earnings yield and return on capital using his own definitions for each.

Historical data screen feature highlight

This month, GuruFocus Premium Plus members received a new Screener tool that allows them to screen using multiple years of data at one time. For example, one can identify stocks that had cash-to-debt ratios of at least 1 each year over the past five years. Figure 2 illustrates a sample historical data screen for cash-to-debt, which measures a company's ability to pay off debt with cash on hand. A cash-to-debt ratio of at least 1 means the company can pay off debt with cash on hand; otherwise, the company may have a debt burden especially if its interest coverage ratio is less than Benjamin Graham's safe threshold of five.

Figure 2

Caledonia

Caledonia's Greenblatt earnings yield of 18.68% outperforms 96.52% of global competitors.

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Caledonia explores, develops and mines gold primarily in the Blanket Gold Mine region of southwest Zimbabwe. GuruFocus ranks the company's financial strength 9 out of 10 on several positive investing signs, which include a high Piotroski F-score of 7 and a strong Altman Z-score of 9.33.

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Additionally, Caledonia's debt-to-equity ratio of 0.01 outperforms approximately 82% of global competitors even though cash-to-debt and interest coverage ratios underperform more than half of global gold miners.

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Industrias Bachoco

Industrias Bachoco's Greenblatt earnings yield of 19.97% outperforms 92.04% of global competitors.

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Industrias Bachoco produces, processes, markets and sells chicken and eggs in both the U.S. and Mexico. GuruFocus ranks the Mexican packaged food company's financial strength and profitability 8 out of 10 on several positive investing signs, which include a three-star business predictability rank, a high Piotroski F-score of 7, a strong Altman Z-score of 4 and a return on assets that outperforms over 73.6% of global competitors.

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Miller Industries

Miller Industries' Greenblatt earnings yield of 12.74% outperforms 87.93% of global competitors.

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The Ooltewah, Tennessee-based company manufactures a wide range of vehicle towing and recovery equipment, including wreckers, car carriers and trailer bodies. GuruFocus ranks the company's financial strength and profitability 8 out of 10 on several positive investing signs, which include a 3.5-star business predictability rank, expanding operating margins, a strong Altman Z-score of 5.5 and a cash-to-debt ratio that outperforms 84.53% of global competitors.

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Gurus with holdings in Miller Industries include Chuck Royce (Trades, Portfolio)'s Royce & Associates, Jim Simons (Trades, Portfolio)' Renaissance Technologies, Jeremy Grantham (Trades, Portfolio)'s GMO and Robert Olstein (Trades, Portfolio)'s Olstein Capital Management.

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NetApp

NetApp's Greenblatt earnings yield of 11.48% outperforms 83.4% of global competitors.

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The Sunnyvale, California-based company provides enterprise data management and storage solutions. GuruFocus ranks the company's profitability 8 out of 10 on several positive investing signs, which include a 3.5-star business predictability rank, a high Piotroski F-score of 7 and an operating margin that has increased approximately 15.50% per year on average over the past five years and is outperforming over 90% of global competitors.

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Disclosure: The author is long Miller Industries. A cash-to-debt ratio of 10,000 means that the company had zero long-term debt for the period.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

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