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5 High Earnings Yield Value Picks to Counter a Dicey September
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The U.S. stock market finally ran out of steam after the big summer rally that started mid-June and continued till mid-August. During that timeframe, the S&P 500 jumped 17%. But the rally petered out in the second half of August. All the three major indices, including The Dow, the S&P 500 and the Nasdaq, declined more than 4% in August.
Brace for a Rough September
Market experts warn investors to brace for more volatility this month as September is traditionally considered the worst month for the stock markets. This could be an especially unkind month for investors considering inflationary concerns and an extremely hawkish Fed. Fed Chairman Jerome Powell’s resolute stance at the Jackson Hole conference that he won’t back off in the fight against inflation even if it results in economic pain isn’t going down too well with investors.
The Fed intends to raise interest rates and keep them high until the inflation rate comes back down to the targeted sub-2% level. And it intends to do whatever it takes to get there. "Reducing inflation is likely to require a sustained period of below-trend growth," Powell said. It could also lead to a recession. Needless to say, the market didn’t react well to the comments, as they essentially crushed any hopes that the Fed would soon reverse its rate-hike trajectory.
Market watchers have been keeping a close eye on three major developments this month. The first is the August jobs figures, which are already out. A stronger-than-expected jobs report, with nonfarm payrolls increasing 315K last month, is only likely to embolden the Fed to remain aggressive. The other two major events in the month include the U.S. inflation numbers that will be released on Sep 13 and the FOMC meeting on Sep 20-21.
The recent meetings and other indications call for a significant increase in rates, and there’s a fat chance that the incoming data (including the pivotal inflation report) before the meeting will change that course. Most analysts expect the Fed to jack up rates by another 75 bps in September to put brakes on inflation.
Considering the given scenario, investors are highly worried about the market’s behavior in a historically weak September. Most likely, history will repeat itself. At this juncture, if you wish to stay exposed to equity investing, consider value investing. This could be one of the most effective investment approaches amid the escalating uncertainty. We have highlighted five value stocks, namely Albemarle Corporation (ALB - Free Report) , WESCO International, Inc. (WCC - Free Report) , Scorpio Tankers Inc (STNG - Free Report) , East West Bancorp (EWBC - Free Report) and Targa Resources Corp. (TRGP - Free Report) , which carry high earnings yield and are worth placing your bets on.
Focus on Value Investing Using Earnings Yield Metric
Value investing takes a long-term view and seeks to gauge the intrinsic value of the companies based on their fundamental strength, earnings potential and financials. Value investors benefit from identifying and buying stocks, which are underestimated by the equity market and are thus trading below their true value, and eventually make handsome returns when the stock price rises toward its intrinsic value to reflect actual fundamentals.
One of the most common valuation metrics to pick undervalued stocks with solid upside potential is the P/E ratio. However, there’s another interesting ratio that you can consider for ferreting out attractively valued stocks. And that is earnings yield, which is nothing but the reciprocal of the P/E ratio, albeit a little more illuminating than the traditional P/E ratio.
Earnings yield is calculated as annual earnings per share (EPS) divided by market price — the inverse of the P/E ratio. This metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today. While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued, while those with lower earnings yield are seen as overpriced.
Earnings yield has the edge over the P/E ratio as the former also facilitates the comparison of stocks with fixed-income securities. Investors often compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a stock is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.
Picking the Right Way
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.
Below we have highlighted five of the 122 stocks that made it through the screen:
Albemarle: Charlotte-based Albemarle is a premier specialty chemicals company. Albemarle is benefiting from higher volumes in its lithium business.Higher customer demand, new capacity and plant productivity improvements are supporting volumes. The company also remains committed to delivering incremental returns to its shareholders.
The Zacks Consensus Estimate for Albemarle’s 2022 earnings and sales suggests year-over-year growth of 426% and 125%, respectively. ALB surpassed estimates in the trailing four quarters, the average being 24.2%. The stock currently sports a Zacks Rank #1.
WESCO: Based in Pittsburgh, WESCO is one of the largest players in the highly fragmented distribution market for electrical construction products in North America. WCC is currently benefiting from a strong performance by all three business units – Electrical and Electronic Solutions, Communications and Security Solutions and Utility and Broadband Solutions (UBS). Additionally, contributions from expanded product and service offerings are driving top-line growth.
The Zacks Consensus Estimate for WESCO’s 2022 earnings and sales suggests year-over-year growth of 58% and 17.2%, respectively. WCC surpassed estimates in the trailing four quarters, the average being 26%. The stock currently sports a Zacks Rank #1.
Scorpio Tankers: Headquartered in Monaco, Scorpio Tankers operates as a shipping company. It has a diversified blue-chip customer base and provides seaborne transportation of crude oil and other petroleum products worldwide. Efforts to upgrade its fleet are commendable. An uptick in voyage revenues with the rise in passengers augurs well for this shipping stock.
The Zacks Consensus Estimate for STNG’s 2022 earnings and sales suggests year-over-year growth of 263% and 129%, respectively. Scorpio Tankers surpassed estimates in three of the four trailing four quarters and missed once, the average being 14.7%. The stock currently sports a Zacks Rank #1.
East West Bancorp: Headquartered in Pasadena, EWBC serves as a financial bridge between the United States and Greater China by providing various personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and others. Rising rates and a strong balance sheet position are likely to aid East West Bancorp’s revenues. Also, its enhanced capital deployment plans reflect a solid liquidity position.
The Zacks Consensus Estimate for EWBC’s 2022 earnings and sales suggests year-over-year growth of 27.7% and 26.4%, respectively. East West Bancorp surpassed estimates in three of the four trailing four quarters and missed once, the average being 4.7%. The stock currently sports a Zacks Rank #1.
Targa: Headquartered in Houston, Targa is one of the leading providers of integrated midstream services in North America. Targa’s fractionation ownership position in Mont Belvieu is among the company’s best midstream assets.TRGP’s sizable presence in the Permian Basin enhances its growth potential. The company earns roughly 80% of its gross margins from fee-based contracts. This results in steady cash flow through the boom-and-bust cycle.
The Zacks Consensus Estimate for TRGP’s 2022 earnings and sales suggests year-over-year growth of 27.7% and %, respectively. The consensus mark for Targa’s 2022 EPS has moved up 31.7% over the past 30 days. The stock currently carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, 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.
Image: Bigstock
5 High Earnings Yield Value Picks to Counter a Dicey September
The U.S. stock market finally ran out of steam after the big summer rally that started mid-June and continued till mid-August. During that timeframe, the S&P 500 jumped 17%. But the rally petered out in the second half of August. All the three major indices, including The Dow, the S&P 500 and the Nasdaq, declined more than 4% in August.
Brace for a Rough September
Market experts warn investors to brace for more volatility this month as September is traditionally considered the worst month for the stock markets. This could be an especially unkind month for investors considering inflationary concerns and an extremely hawkish Fed. Fed Chairman Jerome Powell’s resolute stance at the Jackson Hole conference that he won’t back off in the fight against inflation even if it results in economic pain isn’t going down too well with investors.
The Fed intends to raise interest rates and keep them high until the inflation rate comes back down to the targeted sub-2% level. And it intends to do whatever it takes to get there. "Reducing inflation is likely to require a sustained period of below-trend growth," Powell said. It could also lead to a recession. Needless to say, the market didn’t react well to the comments, as they essentially crushed any hopes that the Fed would soon reverse its rate-hike trajectory.
Market watchers have been keeping a close eye on three major developments this month. The first is the August jobs figures, which are already out. A stronger-than-expected jobs report, with nonfarm payrolls increasing 315K last month, is only likely to embolden the Fed to remain aggressive. The other two major events in the month include the U.S. inflation numbers that will be released on Sep 13 and the FOMC meeting on Sep 20-21.
The recent meetings and other indications call for a significant increase in rates, and there’s a fat chance that the incoming data (including the pivotal inflation report) before the meeting will change that course. Most analysts expect the Fed to jack up rates by another 75 bps in September to put brakes on inflation.
Considering the given scenario, investors are highly worried about the market’s behavior in a historically weak September. Most likely, history will repeat itself. At this juncture, if you wish to stay exposed to equity investing, consider value investing. This could be one of the most effective investment approaches amid the escalating uncertainty. We have highlighted five value stocks, namely Albemarle Corporation (ALB - Free Report) , WESCO International, Inc. (WCC - Free Report) , Scorpio Tankers Inc (STNG - Free Report) , East West Bancorp (EWBC - Free Report) and Targa Resources Corp. (TRGP - Free Report) , which carry high earnings yield and are worth placing your bets on.
Focus on Value Investing Using Earnings Yield Metric
Value investing takes a long-term view and seeks to gauge the intrinsic value of the companies based on their fundamental strength, earnings potential and financials. Value investors benefit from identifying and buying stocks, which are underestimated by the equity market and are thus trading below their true value, and eventually make handsome returns when the stock price rises toward its intrinsic value to reflect actual fundamentals.
One of the most common valuation metrics to pick undervalued stocks with solid upside potential is the P/E ratio. However, there’s another interesting ratio that you can consider for ferreting out attractively valued stocks. And that is earnings yield, which is nothing but the reciprocal of the P/E ratio, albeit a little more illuminating than the traditional P/E ratio.
Earnings yield is calculated as annual earnings per share (EPS) divided by market price — the inverse of the P/E ratio. This metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today. While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued, while those with lower earnings yield are seen as overpriced.
Earnings yield has the edge over the P/E ratio as the former also facilitates the comparison of stocks with fixed-income securities. Investors often compare the earnings yield of a stock to the prevailing interest rates, such as the current 10-year Treasury yield, to get a sense of the return on investment it offers compared to virtually risk-free returns.
If the yield on a stock is lower than the 10-year Treasury yield, it would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.
Picking the Right Way
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.
5 Stocks to Buy
Below we have highlighted five of the 122 stocks that made it through the screen:
Albemarle: Charlotte-based Albemarle is a premier specialty chemicals company. Albemarle is benefiting from higher volumes in its lithium business.Higher customer demand, new capacity and plant productivity improvements are supporting volumes. The company also remains committed to delivering incremental returns to its shareholders.
The Zacks Consensus Estimate for Albemarle’s 2022 earnings and sales suggests year-over-year growth of 426% and 125%, respectively. ALB surpassed estimates in the trailing four quarters, the average being 24.2%. The stock currently sports a Zacks Rank #1.
WESCO: Based in Pittsburgh, WESCO is one of the largest players in the highly fragmented distribution market for electrical construction products in North America. WCC is currently benefiting from a strong performance by all three business units – Electrical and Electronic Solutions, Communications and Security Solutions and Utility and Broadband Solutions (UBS). Additionally, contributions from expanded product and service offerings are driving top-line growth.
The Zacks Consensus Estimate for WESCO’s 2022 earnings and sales suggests year-over-year growth of 58% and 17.2%, respectively. WCC surpassed estimates in the trailing four quarters, the average being 26%. The stock currently sports a Zacks Rank #1.
Scorpio Tankers: Headquartered in Monaco, Scorpio Tankers operates as a shipping company. It has a diversified blue-chip customer base and provides seaborne transportation of crude oil and other petroleum products worldwide. Efforts to upgrade its fleet are commendable. An uptick in voyage revenues with the rise in passengers augurs well for this shipping stock.
The Zacks Consensus Estimate for STNG’s 2022 earnings and sales suggests year-over-year growth of 263% and 129%, respectively. Scorpio Tankers surpassed estimates in three of the four trailing four quarters and missed once, the average being 14.7%. The stock currently sports a Zacks Rank #1.
East West Bancorp: Headquartered in Pasadena, EWBC serves as a financial bridge between the United States and Greater China by providing various personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and others. Rising rates and a strong balance sheet position are likely to aid East West Bancorp’s revenues. Also, its enhanced capital deployment plans reflect a solid liquidity position.
The Zacks Consensus Estimate for EWBC’s 2022 earnings and sales suggests year-over-year growth of 27.7% and 26.4%, respectively. East West Bancorp surpassed estimates in three of the four trailing four quarters and missed once, the average being 4.7%. The stock currently sports a Zacks Rank #1.
Targa: Headquartered in Houston, Targa is one of the leading providers of integrated midstream services in North America. Targa’s fractionation ownership position in Mont Belvieu is among the company’s best midstream assets.TRGP’s sizable presence in the Permian Basin enhances its growth potential. The company earns roughly 80% of its gross margins from fee-based contracts. This results in steady cash flow through the boom-and-bust cycle.
The Zacks Consensus Estimate for TRGP’s 2022 earnings and sales suggests year-over-year growth of 27.7% and %, respectively. The consensus mark for Targa’s 2022 EPS has moved up 31.7% over the past 30 days. The stock currently carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial to the Research Wizard stock picking and backtesting software. You can also create your own strategies and test them first before making investments.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, 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 at: https://www.zacks.com/performance.