Earnings yield hints at further gains for midcaps | Economic Times

Mumbai: Mid- and small-cap stocks may be poised for a rally if their current earnings yield — a measure of a stock’s expected returns — is to go by. An analysis showed the trailing earnings yield of 200 stocks of the NSE-500 index is more than 5%.“In the past, we have seen that earnings yield looks higher at the early recovery phase. In 2013, when earnings yield was above 4%, we have seen a big rally in mid-caps and small-caps during 2013-2017,” said Sanjeev Hota, head of research at Sharekhan.Earnings yield is earnings per share (EPS) for the most recent 12-month period divided by the current market price. It is the inverse of the price earnings (PE) ratio.So, if a company has an earnings yield of 5%, it means the company expects to return at least 5 for 100 worth of shares.Analysts said stocks such as Gujarat State Petronet, CESC, Linde India, Chambal Fertilisers, Redington, PNC Infra, GNFC, Welspun Corp, Gujarat Alkalies, among others, have trailing earnings yield of over 10%. Small-cap stocks such as NCC, Phillips Carbon Black, Bombay Dyeing, JK Tyre and Sadbhav Engineering, among others, are currently trading at earnings yield of over 10.78117078“Important here is to choose the right quality stock, where there is a mismatch between earnings recovery potential and current valuation, which gives a good amount of margin of safety for investment,” said Hota.Analysts say when earnings yield is higher than the bond yield, there is usually more money flow into equities.At the height of the mid- and small-cap euphoria during January 2018, the line representing earnings yield of large-, mid- and small-cap stocks had flattened, indicating zero risk spreads for riskier smaller shares. After the selloff, the risk spread of small- and micro-caps over large-caps has widened significantly.“Mid- and small-cap stocks peaked out in Jan ’18 and since then they have had a bear run which has increased the earnings yield spread of micro-, small- and mid-caps over large-caps to 460 bps, 180 bps and 110 bps, currently,” said Vinod Karki, head – strategy, ICICI Securities. “Lollapalooza effect expected in small- and mid-caps as new multi-cap norms, global liquidity and margin of safety converge.”