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Lift Portfolio Value With These 5 High Earnings Yield Picks

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U.S. inflation cooled off for the sixth straight month in December after hitting a 40-year high in mid-2022. The Bureau of Labor Statistics noted that the consumer price index rose 6.5% last month, down from 7.1% in November. The reading is sharply down from the peak of 9.1% attained in June 2022 but still way above the Fed’s 2% inflation target.

The Fed’s aggressive monetary policy tightening is paying off, albeit slowly. To rein in the sticky inflation, the Fed jacked up interest rates seven times in 2022, taking the benchmark rate to the range of 4.25% and 4.50% — the highest rate in 15 years. The Fed indicated that it plans to keep cranking up the borrowing rates for longer through 2023 before halting further hikes next year, leaving the benchmark rate at a high level.

In a rising rate environment, which we have been witnessing currently, value investing is one of the most effective investment approaches. Are you ready to take advantage of the value stock opportunities?

The value investing approach seeks to profit from investing in 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.

The 2022 pullbacks have given investors a chance to scoop up strong stocks with irresistible entry points. Consumers entered 2023 more upbeat, as is evident from the consumer sentiment index, which improved for the second consecutive month in January as inflation eased. With consumers growing more hopeful about the U.S. economy, now is the time for investors to flourish on beaten-down valuations.

So which companies could fetch you good returns over the coming months in an economy, which is currently filled with hope, challenges as well as uncertainty? We highlight a few high earnings yield value stocks that could be good additions to your portfolio now. These include Reinsurance Group of America (RGA - Free Report) , Jabil, Inc. (JBL - Free Report) Liberty Energy (LBRT - Free Report) , Centerra Gold Inc. (CGAU - Free Report) and Collegium Pharmaceutical Inc. (COLL - Free Report) .

Play Value With High Earnings Yield Stocks

When considering valuation metrics, the first ratio that pops into our minds is the price-to-earnings 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. 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 P/E enjoys great popularity among value investors, earnings yield could prove a better alternative in many cases. While it is essentially a reciprocal of the P/E ratio, the metric 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 82 stocks that made it through the screen:

Reinsurance Groupis a leading global provider of traditional life and health reinsurance, with operations in the United States, Latin America, Canada, Europe, the Middle East, Africa, Asia, and Australia. The Zacks Consensus Estimate for RGA’s 2023 sales and earnings implies year-over-year growth of 3.3% and 5.5%, respectively. The consensus mark for 2023 earnings has moved north by 36 cents a share over the past 30 days. Reinsurance Group currently sports a Zacks Rank #1 and has a Value Score of A.

Jabil is one of the largest global suppliers of electronic manufacturing services. The firm’s client list includes the likes of Apple, SolarEdge and other giants in critical and game-changing industries. The Zacks Consensus Estimate for JBL’s 2023 sales and earnings implies year-over-year growth of 3% and 6%, respectively. The consensus mark for 2023 earnings has moved north by 24 cents a share over the past 60 days. Jabil currently sports a Zacks Rank #1 and has a Value Score of A.

Liberty Energy is a premier provider of hydraulic fracturing and other auxiliary services to onshore exploration and production companies in North America. The Zacks Consensus Estimate for Liberty Energy’s 2023 sales and earnings implies year-over-year growth of 27% and 58%, respectively. The consensus mark for 2023 earnings has moved north by 5 cents a share over the past 30 days. LBRT currently carries a Zacks Rank #2 and has a Value Score of A.

Centerra Gold is a gold mining company. It is focused on operating, developing, exploring and acquiring gold properties, principally in North America, Asia and other markets. The Zacks Consensus Estimate for Centerra Gold’s 2023 sales and earnings implies year-over-year growth of 34% and 771%, respectively. The consensus mark for 2023 earnings has moved north by 3 cents a share over the past 60 days. CGAU currently carries a Zacks Rank #2 and has a Value Score of A.

Collegium is a specialty pharmaceutical company. It develops and commercializes prescription and over-the-counter pharmaceuticals for the treatment of central nervous system, and respiratory and skin-related disorders. The Zacks Consensus Estimate for Collegium’s 2023 sales and earnings implies year-over-year growth of 25% and 42%, respectively. The consensus mark for 2023 earnings has moved north by 20 cents a share over the past 30 days. COLL currently carries a Zacks Rank #2 and has a Value Score of A.

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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.

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