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4 High Earnings Yield Value Picks to Counter Hawkish Fed
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After a rocky 2022 marred by the Russia-Ukraine war, sky-high inflation and a string of interest rate hikes to tame the same, investors have been seemingly breathing a sigh of relief at the somewhat strong start to 2023. While the S&P 500 is up around 4% so far this year, it's too early to celebrate as inflation remains sticky, and concerns of rate hikes and economic slowdown persist. At least that’s what the hotter-than-expected CPI data in January and the latest Fed minutes indicate.
The S&P 500 slid for the fourth consecutive day as investors digested the minutes from the Fed’s most recent meeting released yesterday. The minutes signaled that almost all officials expected further rate hikes as inflation remains well above the Fed’s target of 2%. The minutes noted that “substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.” While the majority were in favor of a rate hike by 25 basis points (bps), a few also called for a 50-bps move.
While the worst of inflation may be behind us, it’s still way above the Central Bank’s target and too early to expect a shift of stance from the Fed yet. So, the bottom line is that the broader headwinds are far from over, whether it is the unceasing Russia-Ukraine war, which just marked its first anniversary, the stubborn inflation or the Fed’s resolute stance to fight it. Economic uncertainty persists and investors should expect volatility to stay.
Tackle Your Portfolio Well as Fed Tackles inflation
In times of uncertainty, it's difficult for investors to maintain their cool and they might be tempted to resort to panic selling. In contrast, it might be an opportune time for investors who are flush with cash to get off the sidelines and invest in fundamentally strong companies.
Value investing should be one of the most effective investment approaches now. It takes a long-term view and seeks to gauge the intrinsic value of the companies based on their fundamental strength, earnings potential and financials. 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 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. One could invest in high earnings yield stocks like Graphic Packaging Holding Company (GPK - Free Report) , RenaissanceRe Holdings Ltd. (RNR - Free Report) Halliburton (HAL - Free Report) and CNH Industrial (CNHI - Free Report) to fetch handsome long-term rewards.
Earnings Yield: Inverse of P/E Ratio
Earnings yield is useful for investors concerned about the rate of return on investment. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price. 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.
While earnings yield is nothing but the reciprocal of the P/E ratio, it is albeit a little more illuminating than the traditional P/E ratio as it 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.
The Winning Strategy
We have set an 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.
Here we discuss four of the 73 stocks that qualified the screen:
Graphic Packaging is a sustainable paper and fiber-based packaging firm with a portfolio that services companies in beverages, foodservice, personal care, household products, pets, and beyond. Graphic Packaging made a big strategic acquisition in 2021 and bought AR Packaging, thereby expanding its reach to Europe. Innovation and more circular consumer-packaging solutions are consistently driving GPK’s organic sales growth.
The Zacks Consensus Estimate for GPK’s 2023 earnings suggests year-over-year growth of 17.6%. The consensus mark for Graphic Packaging’s 2023 EPS has been revised upward by 2 cents in the past seven days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 14.25%. The stock currently sports a Zacks Rank #1 (Strong Buy) and has a Value Score of A.
RenaissanceRe: RenaissanceRe is a provider of property-catastrophe reinsurance to insurers and reinsurers globally. It also provides specialty reinsurance on accident, health, aviation, and satellite concerns, along with homeowner’s insurance in various parts of the United States. The company’s rising premiums on the back of solid segmental contributions are a major tailwind. Balance sheet strength and commitment to increasing shareholders' value via dividends and buybacks further boost confidence.
The Zacks Consensus Estimate for RNR’s 2023 earnings suggests year-over-year growth of 219.3%. The consensus mark for RenaissanceRe’s 2023 EPS has been revised upward by $1.66 in the past 30 days. The company surpassed estimates in two of the four trailing quarters, for as many misses. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Halliburton: Halliburton is an oil field services standout that works throughout the entire lifecycle of a project. Halliburton’s products and offerings help oil and gas companies with everything from exploration and well construction all the way to abandonment activities. Through its market-leading pressure pumping operations, Halliburton is well-positioned to benefit from the rising U.S. land drilling activity, tightening supply/demand fundamentals and pricing momentum.
The Zacks Consensus Estimate for HAL’s 2023 earnings suggests year-over-year growth of 43.3%. The consensus mark for Halliburton’s 2023 EPS has been revised upward by 6 cents in the past 30 days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 5.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a Value Score of B.
CNH Industrial: CNH Industrial is one of the leading equipment and services companies engaged in the manufacture and sale of agricultural and construction equipment. Raven Industries and Sampierana buyouts are set to bolster the prospects of CNH Industrial's Agriculture and Construction segments, respectively. Minority stakes in Stout Industrial Technology & EarthOptics will position CNHI as a developer and provider of futuristic technology in the industry.
The Zacks Consensus Estimate for CNHI’s 2023 earnings suggests year-over-year growth of 16.4%. The consensus mark for CNH Industrial’s 2023 EPS has been revised upward by 8 cents in the past 30 days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 14.1%. The stock currently carries a Zacks Rank #2 and has a Value Score of A.
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.
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4 High Earnings Yield Value Picks to Counter Hawkish Fed
After a rocky 2022 marred by the Russia-Ukraine war, sky-high inflation and a string of interest rate hikes to tame the same, investors have been seemingly breathing a sigh of relief at the somewhat strong start to 2023. While the S&P 500 is up around 4% so far this year, it's too early to celebrate as inflation remains sticky, and concerns of rate hikes and economic slowdown persist. At least that’s what the hotter-than-expected CPI data in January and the latest Fed minutes indicate.
The S&P 500 slid for the fourth consecutive day as investors digested the minutes from the Fed’s most recent meeting released yesterday. The minutes signaled that almost all officials expected further rate hikes as inflation remains well above the Fed’s target of 2%. The minutes noted that “substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.” While the majority were in favor of a rate hike by 25 basis points (bps), a few also called for a 50-bps move.
While the worst of inflation may be behind us, it’s still way above the Central Bank’s target and too early to expect a shift of stance from the Fed yet. So, the bottom line is that the broader headwinds are far from over, whether it is the unceasing Russia-Ukraine war, which just marked its first anniversary, the stubborn inflation or the Fed’s resolute stance to fight it. Economic uncertainty persists and investors should expect volatility to stay.
Tackle Your Portfolio Well as Fed Tackles inflation
In times of uncertainty, it's difficult for investors to maintain their cool and they might be tempted to resort to panic selling. In contrast, it might be an opportune time for investors who are flush with cash to get off the sidelines and invest in fundamentally strong companies.
Value investing should be one of the most effective investment approaches now. It takes a long-term view and seeks to gauge the intrinsic value of the companies based on their fundamental strength, earnings potential and financials. 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 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. One could invest in high earnings yield stocks like Graphic Packaging Holding Company (GPK - Free Report) , RenaissanceRe Holdings Ltd. (RNR - Free Report) Halliburton (HAL - Free Report) and CNH Industrial (CNHI - Free Report) to fetch handsome long-term rewards.
Earnings Yield: Inverse of P/E Ratio
Earnings yield is useful for investors concerned about the rate of return on investment. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price. 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.
While earnings yield is nothing but the reciprocal of the P/E ratio, it is albeit a little more illuminating than the traditional P/E ratio as it 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.
The Winning Strategy
We have set an 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 Picks
Here we discuss four of the 73 stocks that qualified the screen:
Graphic Packaging is a sustainable paper and fiber-based packaging firm with a portfolio that services companies in beverages, foodservice, personal care, household products, pets, and beyond. Graphic Packaging made a big strategic acquisition in 2021 and bought AR Packaging, thereby expanding its reach to Europe. Innovation and more circular consumer-packaging solutions are consistently driving GPK’s organic sales growth.
The Zacks Consensus Estimate for GPK’s 2023 earnings suggests year-over-year growth of 17.6%. The consensus mark for Graphic Packaging’s 2023 EPS has been revised upward by 2 cents in the past seven days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 14.25%. The stock currently sports a Zacks Rank #1 (Strong Buy) and has a Value Score of A.
RenaissanceRe: RenaissanceRe is a provider of property-catastrophe reinsurance to insurers and reinsurers globally. It also provides specialty reinsurance on accident, health, aviation, and satellite concerns, along with homeowner’s insurance in various parts of the United States. The company’s rising premiums on the back of solid segmental contributions are a major tailwind. Balance sheet strength and commitment to increasing shareholders' value via dividends and buybacks further boost confidence.
The Zacks Consensus Estimate for RNR’s 2023 earnings suggests year-over-year growth of 219.3%. The consensus mark for RenaissanceRe’s 2023 EPS has been revised upward by $1.66 in the past 30 days. The company surpassed estimates in two of the four trailing quarters, for as many misses. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Halliburton: Halliburton is an oil field services standout that works throughout the entire lifecycle of a project. Halliburton’s products and offerings help oil and gas companies with everything from exploration and well construction all the way to abandonment activities. Through its market-leading pressure pumping operations, Halliburton is well-positioned to benefit from the rising U.S. land drilling activity, tightening supply/demand fundamentals and pricing momentum.
The Zacks Consensus Estimate for HAL’s 2023 earnings suggests year-over-year growth of 43.3%. The consensus mark for Halliburton’s 2023 EPS has been revised upward by 6 cents in the past 30 days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 5.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a Value Score of B.
CNH Industrial: CNH Industrial is one of the leading equipment and services companies engaged in the manufacture and sale of agricultural and construction equipment. Raven Industries and Sampierana buyouts are set to bolster the prospects of CNH Industrial's Agriculture and Construction segments, respectively. Minority stakes in Stout Industrial Technology & EarthOptics will position CNHI as a developer and provider of futuristic technology in the industry.
The Zacks Consensus Estimate for CNHI’s 2023 earnings suggests year-over-year growth of 16.4%. The consensus mark for CNH Industrial’s 2023 EPS has been revised upward by 8 cents in the past 30 days. The company surpassed estimates in each of the four trailing quarters, the average surprise being 14.1%. The stock currently carries a Zacks Rank #2 and has a Value Score of A.
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.