2022 was a brutal year for the U.S. stock markets, with all three major indices, including S&P 500, Dow Jones and NASDAQ booking their worst drop since the 2008 financial crisis. The indices snapped a three-year winning streak and recorded the first yearly drop since 2018. The S&P 500, NASDAQ and Dow Jones tumbled about 20%, 33% and 9%, respectively, last year. The Russia-Ukraine war, devastated supply chain systems, an ultra-hawkish Fed, stubborn inflation and recessionary fears upended markets.
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 central banks signaled to keep the interest rates higher for longer through 2023 and no cuts till 2024. As we flip the calendar, the Fed’s aggressive stance and surging COVID-19 cases could continue to play havoc in the market. Many analysts project that stocks will sink to fresh lows before rebounding in the back half of 2023. As such, severe volatility is expected to persist this year as well, keeping investors on edge.
Value Investing is the Way to Go
In this hair-trigger market, value investing could be one of the most effective investment approaches. The strategy basically seeks to profit from investing in fundamentally strong stocks that appear to be trading at a discount to their intrinsic values. Value investors benefit from identifying and buying stocks that are underestimated by the equity market and are thus trading below their true value, and eventually make handsome returns when the stock price rises toward its intrinsic value to reflect actual fundamentals.
While the P/E ratio is generally regarded as one of the most popular valuation metrics, there’s another interesting ratio that you can consider for ferreting out attractively valued stocks. And that is earnings yield. Consider unlocking your portfolio value with these four high-earnings yield stocks — Hillenbrand Inc. HI, Sociedad Quimica Y Minera SQM, Reinsurance Group of America Incorporated RGA and Modine Manufacturing Company MOD.
Understanding Earnings Yield
For intelligent investors who intend to invest money either in bonds or stocks, information on certain key financial parameters is very important. One such key parameter is earnings yield. Earnings yield is measured as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with higher earnings yield is more likely to provide better returns, other factors remain constant. While comparing stocks, if other factors are similar, pick stocks with higher earnings yield as they are considered undervalued, while those with lower earnings yield are seen as overpriced.
While this ratio is vital for tracking undervalued stocks, it also comes in handy for comparing stocks with the market or fixed-income securities. For comparing the performance of a market index with the 10-year Treasury yield, this ratio is very useful. When the yield of the market index is higher than the 10-year Treasury yield, the stocks can be dubbed as undervalued in comparison to bonds. This indicates that investing in the stock market is a better choice for a value investor. Investment in Treasury-bill is risk-free. However, investing in stocks always comes with a caveat. Hence, it is a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the broader market.
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 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 Days) 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.
Here we discuss four of the 93 stocks that qualified the screen:
Hillenbrand is a global diversified industrial company with multiple market-leading brands that serve a wide variety of industries across the globe. HI’s portfolio comprises two business segments: Process Equipment Group and Batesville.The company currently sports a Zacks Rank #1 and has a Value Score of B.
The Zacks Consensus Estimate for HI’s fiscal 2023 earnings suggests year-over-year growth 8.14%. The consensus mark for Hillenbrand’s fiscal 2023 EPS has been revised upward by 20 cents in the past 60 days. The company surpassed estimates in each of the trailing four quarters, the average surprise being 3.6%.
Sociedad Quimica: Headquartered in Chile, the company produces and distributes lithium and its derivatives. Sociedad Quimica sells its products in more than 60 countries throughout the world. The stock currently sports a Zacks Rank #1 and a Value Score of B.
The Zacks Consensus Estimate for SQM’s 2023 earnings suggests year-over-year growth 17.6%. The consensus mark for Sociedad Quimica’s 2023 EPS has been revised upward by 36 cents in the past 30 days. The company surpassed estimates in three of the four trailing quarters and missed once, the average surprise being 37.4%.
Reinsurance Group of America: Timberlake-based Reinsurance Group of America is a leading global provider of traditional life and health reinsurance and financial solutions with operations in the United States, Latin America, Canada, Europe, the Middle East, Africa, Asia and Australia. The stock flaunts a Zacks Rank #1 and has a Value Score of A.
The Zacks Consensus Estimate for RGA’s 2023 earnings suggests year-over-year growth of 3%. The consensus mark for Reinsurance Group’s 2023 EPS has been revised upward by 13 cents in the past 30 days. The company surpassed estimates in three of the four trailing four quarters and missed once, the average surprise being 49.7%
Modine Manufacturing: Modine Manufacturing operates primarily in a single industry of manufacturing and selling heat transfer equipment, including heat exchangers for cooling all types of engines. Currently, MOD carries a Zacks Rank #2 and has a Value Score of A.
The Zacks Consensus Estimate for MOD’s fiscal 2023 earnings suggests year-over-year growth of 43.1%. The consensus mark for Modine Manufacturing’s fiscal 2023 EPS has been revised upward by 6 cents in the past 60 days. The company surpassed estimates in each of the trailing four quarters, the average surprise being 62%.
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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
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