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5 High Earnings Yield Bets Amid an Uncertain Santa Rally

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While Santa Claus is a fictional character, Santa rally is one seasonal trend in the stock market, which is widely lapped up by the researchers and the market pundits. A consensus carried out from 1950 to 2019 established the fact that December offered positive returns in 52 years and negative returns in 18 years with a return of 1.37%, on average, the second best seen in a year, per moneychimp.com. The December uptrend is mainly attributed to the Santa Claus rally, which refers to the buoyancy in the stock market in the week between Christmas and the New Year's Day.Can the jolly old man in the red overalls provide a major boost to the stock market this time around?

Vaccine News, COVID-19 Cases & Stimulus Hopes to Rule December

It seems less likely that Christmas festivities and Santa Claus will rule the market this December, propelling stocks to trade in the green. Indeed, a surge in shopping during the holidays may provide support to the Wall Street but it will primarily be the vaccine-related developments, COVID-19 cases and the coronavirus-aid package, which will call the shots for the stock market this season.

The FDA recently approved the Pfizer (PFE - Free Report) /BioNTech (BNTX - Free Report) vaccine. While the U.S. authorization of the vaccine is a significant milestone in battling the deadly contagion, full-blown fresh wave of coronavirus cases is looming large, which is dampening investors’ optimism. Concerns still remain over a tediously lengthy delivery and distribution time of the immunization doses. This tug of war between the rising cases of coronavirus and the nationwide implementation of the vaccine will be the chief deciding factor. Uncertainty over a second stimulus package to lift the coronavirus-battered economy also lingers. While the vaccine authorization is something to be cheerful about, the overall unpredictable market sentiment still prevails that could make this Christmas a little less joyous for investors. 

Amid this scenario, investors can bet on high earnings yield stocks that are poised to do well irrespective of the Santa rally or a year-end pullback.  Earnings yield is nothing but the reciprocal of one of the most popular valuation metrics, i.e. the P/E ratio (stock price/earnings per share).

Bet on High Earnings Yield Investing

Earnings yield is an interesting ratio to pick undervalued stocks with solid upside potential. It is calculated as (Annual Earnings per Share/Market Price) x 100. If other factors are constant while comparing stocks, the one with a higher earnings yield has the potential to provide comparatively greater returns.

Earnings yield can also be used to compare the performance of a market index with the 10-year Treasury yield. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered undervalued than bonds. In this situation, investment in the stock market would be a better option for a value investor.

However, bearing in mind the risk-free nature of T-bills, it would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the stock market.

Screening Parameters

We have set Earnings Yield greater than 10% as our primary screening criterion, but it alone cannot be used for picking stocks that have the potential of generating 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 Choices

Here are five of the 51 stocks that made it through the screen:

Winnebago Industries (WGO - Free Report) : One of the leading producers of recreational vehicles in the United States, Winnebago currently sports a Zacks Rank #1. The Zacks Consensus Estimate for fiscal 2021 sales and earnings suggests growth of 28.8% and 79.8% each from the respective year-ago reported figures. The consensus mark for fiscal 2022 sales and earnings suggests year-over-year growth of 5% and 9%, respectively. The company’s bottom line surpassed estimates in three of the trailing four quarters and missed the mark once, the average surprise being24.4%.

General Motors (GM - Free Report) : This Detroit-based company is one of the leading automakers in the world. The Zacks Consensus Estimate for 2021 earnings and sales suggests year-over-year growth of 26.2% and 10.1%, respectively. It has an expected EPS growth rate of 9.9% for the next three-five years. The company’s earnings surpassed estimates in each of the trailing four quarters, the average being 138.3%. The U.S. auto giant currently flaunts a Zacks Rank of 1.

360 DigiTech, Inc. (QFIN - Free Report) : China-based 360 DigiTech provides a data driven, technology empowered digital platform. The Zacks Consensus Estimate for fiscal 2021 earnings and sales hints year-over-year growth of 21.7% and 2.2%, respectively. The Zacks Consensus Estimate for next-year earnings rose 11.6% over the past 60 days. The stock currently carries a Zacks Rank #2.

Fulgent Genetics, Inc. (FLGT - Free Report) : Headquartered in California, this Zacks #1 Ranked company provides genetic testing services to physicians with clinically actionable diagnostic information. The Zacks Consensus Estimate for 2020 sales and earnings indicates growth of 2,189.5% and 832.4% each from the respective year-ago reported figures. The Zacks Consensus Estimate for 2021 earnings and sales suggests year-over-year growth of 31% and 19.2%, respectively.

Ally Financial Inc. (ALLY - Free Report) : This Detroit-based #1 Ranked firm is a diversified financial services company, providing a broad array of financial products and services, primarily to automotive dealers as well as their customers. The Zacks Consensus Estimate for 2021 sales and earnings suggests year-over-year growth of 7.8% and 53.8%, respectively. Its earnings estimates for 2021 have moved 7 cents north to $75 per share over the past 30 days.

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DisclosureOfficers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available athttps://www.zacks.com/performance