The recent consumer price index (ETF:CPI) data revealed that U.S. inflation is running hotter than anticipated. Prices rose 0.4% in March over the previous month and 3.5% year over year, surpassing forecasts of 0.3% and 3.4%, respectively. The data confirmed concerns that inflation is stickier than expected and lowered expectations for imminent interest rate cuts by the Federal Reserve.
Market predictions for rate cuts in June have shifted significantly since the CPI release. The Fed is determined not to cut rates until it has “gained greater confidence” that inflation is headed back toward 2%. In addition, geopolitical unrest and rising energy costs pose risks that could further escalate inflation.
In this uncertain landscape, value investing is one of the most prudent strategies.This 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 that value, reflecting the actual fundamentals. Value stocks, which often provide steady dividend payouts, offer a degree of safety in uncertain market environments.
Using the Earnings Yield Metric
One interesting ratio that you can consider for ferreting out attractively valued stocks is earnings yield. This metric, expressed in percentage, is calculated as annual earnings per share (ETF: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 ones with higher earnings yield are 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.
You can unlock your portfolio value by investing in high earnings yield stocks like StoneCo Ltd. (NASDAQ:STNE), HCI Group Inc. (NYSE:HCI), Seanergy Maritime Holdings (NASDAQ:SHIP) and Pilgrim’s Pride Corporation (NASDAQ:PPC) to fetch handsome long-term rewards.
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.
Our Picks
Here we discuss four of the 26 stocks that qualified the screen:
StoneCo: Based in Brazil, this financial technology solutions provider offers an end-to-end cloud-based technology platform to conduct electronic commerce across in-store, online and mobile channels. The Zacks Consensus Estimate for STNE’s 2024 and 2025 earnings implies year-over-year growth of 34% and 11.5%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 11 cents and 19 cents, respectively, over the past 30 days. StoneCo currently sports a Zacks Rank #1 and has a Value Score of B.
HCI Group: Headquartered in Florida, the company is engaged in diverse business activities, including property and casualty insurance, information technology, real estate and reinsurance. The Zacks Consensus Estimate for HCI’s 2024 and 2025 earnings implies year-over-year growth of 39% and 13%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 10 cents and 27 cents, respectively, over the past 30 days. HCI Group currently sports a Zacks Rank #1 and has a Value Score of B.
Seanergy: Headquartered in Greece, the company provides marine dry bulk transportation services through a modern fleet of Capesize vessels. Its operating fleet consists of 17 vessels. The Zacks…
Read More: 4 High Earnings Yield Stocks to Buy Amid Market Uncertainty