We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Leverage Value Investing Opportunities Amid Fed's Hawkish Pause
Read MoreHide Full Article
The Federal Reserve has hit the pause button on interest rate hikes for now, in a move that was largely anticipated by the markets. This decision came after 10 consecutive hikes in 15 months, marking the fastest series of increases in four decades. Leaving the Fed Funds rate unchanged from the last meeting at 5.00-5.25% (midpoint of 5.13%), inflation is now way below its peak but still well above the Fed’s 2% target. Jerome Powell noted that conditions necessary to bring down inflation are starting to take shape. Factors such as slowing wage growth and a cooling job market are expected to reduce inflationary pressure over time. However, the Fed's stance does not rule out the possibility of future rate hikes.
The Fed’s move is being characterized as a "hawkish pause," meaning that while the Fed is not raising rates at this time, it remains vigilant and is ready to act aggressively, if necessary, to prevent inflation from getting out of control. In fact, the FOMC projects as many as two additional quarter-point rate hikes before the year ends. However, Powell emphasized that the Fed intends to move at a more moderate pace than last year.
The immediate market response to the news was a dip in stock prices. But markets rebounded briefly after encouraging remarks about the fight against inflation. Moving forward, investors should be prepared for increased market volatility as the Fed's future actions and economic reports could trigger significant market reactions.
Focus on Value Investing
While the Fed's decision to pause the rate hikes may bring a temporary respite, the possibility of future increases cannot be ruled out. In such a scenario, adopting a value investing approach could help investors navigate the financial market turbulence.
Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. This approach is built on the idea that the market overreacts to good and bad news, resulting in stock price movements that do not reflect a company's long-term fundamentals.
In an environment where interest rates are high and potentially rising, companies with solid fundamentals, healthy balance sheets, and a steady cash flow become even more attractive. Such companies, often the target of value investors, are likely to withstand economic pressure better than their overvalued counterparts.
Value investing, with its focus on long-term capital appreciation and focus on the safety of the principal, could be a suitable approach in these uncertain times. The key is to stay focused on individual company fundamentals, look for inherent value and have the patience to wait for the market to recognize this value.
Play on Earnings Yield Strength
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 Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA - Free Report) , Dave & Buster's Entertainment (PLAY - Free Report) , Wabash National Corporation (WNC - Free Report) , TransAlta Corporation (TAC - Free Report) and Copa Holdings, S.A. (CPA - Free Report) to fetch handsome long-term rewards.
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 five of the 30 stocks that qualified the screen:
Loma Negra is a cement manufacturer, focusing on the production and commercialization of cement, masonry cement, aggregates, concrete and lime. The Zacks Consensus Estimate for LOMA’s 2023 earnings implies year-over-year growth of 784.6%. Estimates for 2023 and 2024 earnings per share have moved up by 18 cents and 25 cents, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Dave & Buster’s owns and operates entertainment and dining venues for adults and families in North America. The Zacks Consensus Estimate for PLAY’s current fiscal earnings implies year-over-year growth of 24.3%. Estimates for current and next fiscal earnings per share have moved up by 16 cents and 13 cents, respectively, over the past seven days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Wabash designs, manufactures, and services products such as dry freight and refrigerated trailers, tank trailers, dry and refrigerated truck bodies, trailer aerodynamic solutions, and much more. The Zacks Consensus Estimate for WNC’s 2023 earnings implies year-over-year growth of 90.7%. Estimates for 2023 and 2024 earnings per share have moved up by $1.39 and 45 cents, respectively, over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
TransAlta is an energy company involved in the development, production and sale of electric energy in Canada and the United States. The Zacks Consensus Estimate for TAC’s 2023 earnings implies a whopping year-over-year growth of 1,325%. Estimates for 2023 earnings per share have moved up by 33 cents over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Copa Holdings provides airline passenger and cargo services. The Zacks Consensus Estimate for CPA’s 2023 earnings implies year-over-year growth of 79.4%. Estimates for 2023 and 2024 earnings per share have moved up by 33 cents and 24 cents, respectively, over the past seven days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of B.
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
Leverage Value Investing Opportunities Amid Fed's Hawkish Pause
The Federal Reserve has hit the pause button on interest rate hikes for now, in a move that was largely anticipated by the markets. This decision came after 10 consecutive hikes in 15 months, marking the fastest series of increases in four decades. Leaving the Fed Funds rate unchanged from the last meeting at 5.00-5.25% (midpoint of 5.13%), inflation is now way below its peak but still well above the Fed’s 2% target. Jerome Powell noted that conditions necessary to bring down inflation are starting to take shape. Factors such as slowing wage growth and a cooling job market are expected to reduce inflationary pressure over time. However, the Fed's stance does not rule out the possibility of future rate hikes.
The Fed’s move is being characterized as a "hawkish pause," meaning that while the Fed is not raising rates at this time, it remains vigilant and is ready to act aggressively, if necessary, to prevent inflation from getting out of control. In fact, the FOMC projects as many as two additional quarter-point rate hikes before the year ends. However, Powell emphasized that the Fed intends to move at a more moderate pace than last year.
The immediate market response to the news was a dip in stock prices. But markets rebounded briefly after encouraging remarks about the fight against inflation. Moving forward, investors should be prepared for increased market volatility as the Fed's future actions and economic reports could trigger significant market reactions.
Focus on Value Investing
While the Fed's decision to pause the rate hikes may bring a temporary respite, the possibility of future increases cannot be ruled out. In such a scenario, adopting a value investing approach could help investors navigate the financial market turbulence.
Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. This approach is built on the idea that the market overreacts to good and bad news, resulting in stock price movements that do not reflect a company's long-term fundamentals.
In an environment where interest rates are high and potentially rising, companies with solid fundamentals, healthy balance sheets, and a steady cash flow become even more attractive. Such companies, often the target of value investors, are likely to withstand economic pressure better than their overvalued counterparts.
Value investing, with its focus on long-term capital appreciation and focus on the safety of the principal, could be a suitable approach in these uncertain times. The key is to stay focused on individual company fundamentals, look for inherent value and have the patience to wait for the market to recognize this value.
Play on Earnings Yield Strength
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 Loma Negra Compañía Industrial Argentina Sociedad Anónima (LOMA - Free Report) , Dave & Buster's Entertainment (PLAY - Free Report) , Wabash National Corporation (WNC - Free Report) , TransAlta Corporation (TAC - Free Report) and Copa Holdings, S.A. (CPA - Free Report) to fetch handsome long-term rewards.
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 five of the 30 stocks that qualified the screen:
Loma Negra is a cement manufacturer, focusing on the production and commercialization of cement, masonry cement, aggregates, concrete and lime. The Zacks Consensus Estimate for LOMA’s 2023 earnings implies year-over-year growth of 784.6%. Estimates for 2023 and 2024 earnings per share have moved up by 18 cents and 25 cents, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Dave & Buster’s owns and operates entertainment and dining venues for adults and families in North America. The Zacks Consensus Estimate for PLAY’s current fiscal earnings implies year-over-year growth of 24.3%. Estimates for current and next fiscal earnings per share have moved up by 16 cents and 13 cents, respectively, over the past seven days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Wabash designs, manufactures, and services products such as dry freight and refrigerated trailers, tank trailers, dry and refrigerated truck bodies, trailer aerodynamic solutions, and much more. The Zacks Consensus Estimate for WNC’s 2023 earnings implies year-over-year growth of 90.7%. Estimates for 2023 and 2024 earnings per share have moved up by $1.39 and 45 cents, respectively, over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
TransAlta is an energy company involved in the development, production and sale of electric energy in Canada and the United States. The Zacks Consensus Estimate for TAC’s 2023 earnings implies a whopping year-over-year growth of 1,325%. Estimates for 2023 earnings per share have moved up by 33 cents over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Copa Holdings provides airline passenger and cargo services. The Zacks Consensus Estimate for CPA’s 2023 earnings implies year-over-year growth of 79.4%. Estimates for 2023 and 2024 earnings per share have moved up by 33 cents and 24 cents, respectively, over the past seven days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of B.
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.