Investors always search for stocks offering explosive returns. A higher price-to-earnings (P/E) ratio typically helps identify opportunities with higher future growth. However, another important metric is the earnings yield, the inverse of the P/E ratio. Identifying high-yield stocks can be the key to generating outsized gains. They often correlate with highly undervalued share prices.
When EPS increases faster than the stock price, it may lead to a lower forward P/E ratio due to higher EPS expectations. In the earnings yield context, a lower forward P/E ratio suggests that the stock may be discounted compared to its growth potential. Eventually, this can lead to analyst upgrades, increased institutional buying and further price appreciation. This is especially true when the earnings yield surpasses bond yield rates.
Earning yields do not account for future growth prospects. However, forward EPS at a compound annual growth rate (CAGR) focuses on the expected growth in future earnings, profitability and growth potential. At double-digits, this can be a key driver of stock growth when combined with low debt levels and sustainable cash flow generation.
The three picks below feature a higher EPS CAGR than their earnings yield, providing investors with an inside track on high-yield stocks for returns.
Nexstar Media Group (NXST)
Nexstar Media Group (NASDAQ:NXST) is the largest U.S. TV broadcaster with a portfolio of television stations and digital media properties. It recently hired an Amazon Ads senior development manager to help drive new business revenue as political ad spending ramps ahead of the U.S. elections.
Its lower forward P/E ratio of 6.7 times earnings signals potential for capital appreciation, much lower than the industry average of 18.25 times. Investors may find Nexstar appealing due to its relatively high earnings yield of 7.5% and 1-year return of investment incremental capital (ROICC) of 150.85%. Analysts see an impressive 165% yearly EPS growth in CAGR terms and a 32% price upside. This makes NXST one of the high-yield stocks for returns.
Nexstar’s growth expectations may be partially attributed to its high debt, making this a risky play. However, the company used cash flow to repay $30 million of debt, pay $57 million in dividends and repurchase $111 million of stock in the last quarter. Notably, its ability to deliver consistent free cash flow supported a 25% increase in its quarterly dividend, increasing the chances of translating debt into growth.
Permian Resources (PR)
Permian Resources (NYSE:PR) recently added more to its 468,000 total acreage, increased production guidance by 2% and de-risked drilling inventory across multiple horizons. The company is well-positioned to grow, supported by revenue growth of 101% year-on-year (YOY) due to the outperformance of Earthstone assets and synergies from the merger.
The pure-play exploration and production (E&P) firm may be attractive for investors seeking high-yield stocks for returns in the energy sector. It trades at an attractive valuation with a forward P/E ratio of 8.52 times earnings while yielding 7.5%. Analysts expect Permian to deliver an impressive EPS CAGR twice its yield over the next year, driven by rising production volumes, cost efficiencies and favorable commodity prices.
The company’s strong profitability margins hover in the double digits. PR is also committed to returning capital to shareholders through a sustainable dividend, with an annual dividend yield of over 5%.
Recently, analysts at UBS upgraded their rating from neutral to buy. Following a stock offering, PR stock has pulled back and trades 13% below its April peak. Now may be an opportune time to buy back in, with consensus price targets pointing to a 32% upside.
BankUnited (BKU)
BankUnited (NYSE:BKU) provides various banking products and services to individuals and corporate customers across 15 states. The current high interest rate environment may benefit its performance. The Fed may reduce interest rates this year, but rates remain high for a while. Analysts expect BankUnited to deliver an EPS CAGR of 10.42% next year, while its earnings yield stands at 8.26%.
The commercial bank is well positioned for growth due to higher revenue, strong balance sheet and solid interest income growth. Its low net charge-off ratio of 0.02% and non-performing assets ratio of 0.34% reflect its high asset quality. This bodes well for earnings stability while offering a relatively low-risk opportunity.
BankUnited has been raising its dividend annually, with the most recent hike of 7% in February 2024. It kept dividends at 0.29 per share in June and still engaged in share buybacks. However, it will likely pay record dividends for the full year at this rate.
The bank’s strong capital levels and disciplined expense management generated a return on tangible common equity of 7.3% last quarter. While its net interest margin (NIM) showed stability, net profit margins of 15.26% were above the average for banks, continuing a multiyear trend.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
