Except for a short-lived summer rally from mid-June to mid-August, the U.S. stock market has mostly struggled in 2022. A challenging macroeconomic environment has sent stocks tumbling in 2022. Market participants are suffering from supply chain snarls, the Russia-Ukraine war and sky-high inflation. While the Fed has adopted an aggressive monetary stance to tame the stubborn inflation, the efforts haven’t yielded desired results yet. Inflation remains historically elevated, even after the Fed’s hawkish pivot.
All eyes are on the Fed’s official announcement on rates today. Fed Chairman Jerome Powell had been very clear in his message at the Jackson Hole conference that the rate hikes will continue until inflation returns to the 2% target rate. Wall Street is sure that it will jack up its key interest rate by at least 0.75% for a third-straight time when its two-day FOMC meeting ends today.
We have indeed landed in a highly challenging macroeconomic environment after coming out of a once-in-a-lifetime pandemic. With inflation at historically high levels and Fed set to crank borrowing rates further, the threats of recession loom large. Amid all the turmoil and economic uncertainty, markets are likely to remain choppy. In such turbulent times, investors should hunt for fundamentally strong value stocks.
James River Group Holdings, Ltd ( JRVR Quick Quote JRVR - Free Report) , HSBC Holdings plc ( HSBC Quick Quote HSBC - Free Report) , Reinsurance Group of America ( RGA Quick Quote RGA - Free Report) and Amalgamated Financial Corp ( AMAL Quick Quote AMAL - Free Report) are a few high earnings yield value picks that can fetch handsome rewards. Value Investing is the Key Now
The market is at a critical juncture right now, with macro-environment challenges abound. With a number of deterrents doing the rounds in the market, it is wise to look for quality while picking stocks. To this end, value investing may be one of the most effective approaches. The value investing approach seeks to profit from investing in quality stocks that appear to be trading at a discount to their intrinsic values and eventually make handsome returns when the stock price rises toward its intrinsic value to reflect the actual fundamentals. Certainly, the value investment strategy best suits investors with a long-term horizon.
When considering valuation metrics, the first ratio that pops into our minds is the price-to-earnings (P/E) ratio, given its inherent simplicity. But one can also consider another interesting ratio for picking attractively valued stocks. That is earnings yield. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price. It measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings Yield Holds an Edge Over P/E
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.
While earnings yield is simply the reciprocal of the P/E ratio, it’s a little more illuminating than the latter. It 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.
The Winning Strategy
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 to generate 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 four of the 121 stocks that qualified the screen:
James River: Bermuda-based James River is an insurance company, which owns and operates specialty insurance and reinsurance companies. The company operates through Excess and Surplus Lines, Specialty Admitted Insurance and Casualty Reinsurance segments.
The Zacks Consensus Estimate for JRVR’s 2022 earnings and sales suggests year-over-year growth of 137% and 3%, respectively. The consensus mark for James River’s 2022 EPS has moved north by 5 cents in the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
HSBC: Headquartered in London, HSBC provides a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of Jun 30, 2022, it had $2.99 trillion in assets.
The Zacks Consensus Estimate for HSBC’s 2022 earnings and sales suggests year-over-year growth of 13.2% and 5.4%, respectively. The consensus mark for HSBC’s 2022 EPS has moved north by 31 cents in the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
Reinsurance Group: Headquartered in Timberlake, Reinsurance Group is a leading global provider of traditional life and health reinsurance and financial solutions with operations in the United States, Canada, Europe, and many others.
The Zacks Consensus Estimate for RGA’s 2022 earnings and sales suggests year-over-year growth of 1,057.5% and 2.5%, respectively. The consensus mark for Reinsurance Group’s 2022 EPS has moved north by $1.04 in the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
Amalgamated Financial: Headquartered in New York, Amalgamated Financial is the bank holding company for Amalgamated Bank, a full-service commercial bank and a chartered trust company. AMAL provides commercial banking and trust services nationally and offers products and services to both commercial and retail customers.
The Zacks Consensus Estimate for AMAL’s 2022 earnings and sales suggests year-over-year growth of 42.4% and 24.1%, respectively. AMAL surpassed estimates in the trailing four quarters, the average being 22.6%. The stock currently carries a Zacks Rank #2 and has a Value Score of B.
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