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4 High Earnings Yield Picks to Tide Over the Rising Rate Milieu
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In the last couple of years, inflation has soared to 40-year highs, thanks to the deadly pandemic, disrupted supply chain systems and the Russia-Ukraine war. To combat the stubborn inflation, the Federal Reserve adopted a contractionary monetary policy stance. While Fed’s aggressive rate hikes are helping to cool down inflation gradually (as evident by the latest CPI reading), it remains near a 40-year high. However, it has declined from the peak of 9.1% attained in June. Per the latest data, consumer prices rose 7.1% year over year in November, down from 7.7% in October. Despite the encouraging data, the Fed seems to be in no mood to ease its fight against inflation just yet.
Yesterday, the Fed jacked up interest rates by 50 bps, breaking the string of four consecutive 75 bps point hikes but marking the seventh rate hike this year. That raised the Fed’s benchmark rate to a range of 4.25-4.5% — the highest rate in 15 years.
A 50-bps interest rate hike was very much expected. But what didn’t go down well with the market participants was the fact that there would be further rate hikes ahead and no cuts till 2024. The central banks signaled to keep the interest rates higher for longer through 2023. Fed Chair Powell said, “The inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path.”
The FOMC still has a long way to go to rein in inflation and the economy isn't out of the woods just yet. Notably, the FOMC has lowered its GDP growth projection for 2023 from 1.2% to 0.5%. As such, market volatility is here to stay.
Focus on Value Investing
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 — U.S. Silica Holdings , PACCAR (PCAR - Free Report) , CNH Industrial and Sociedad Quimica Y Minera (SQM - Free Report) .
Is Earnings Yield a Better Alternative to P/E?
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 — the inverse of the P/E ratio. Firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Earnings yield captures both the tangible and intangible yield of a firm, as opposed to dividend yield, which only considers the tangible yield.
It should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio, as the former facilitates the comparison of stocks with fixed-income securities. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
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 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.
Here we discuss four of the 119 stocks that qualified the screen:
U.S. Silica: Based in Maryland, Silica Holdings makes and markets commercial silica, a specialized mineral, to a variety of attractive end markets in the United States. U.S. Silica should gain from its expansion actions in the Permian Basin. The Sandbox and EP Minerals buyouts are also expected to make a meaningful contribution.
The company currently sports a Zacks Rank #1 and has a Value Score of A. The Zacks Consensus Estimate for SLCA’s 2022 and 2023 earnings suggests year-over-year growth 342% and 64%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 48.2%.
PACCAR: PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The new DAF lineup, comprising XF, XG and XD models, augurs well. New product launches are set to translate into an improved mix in 2023. PCAR's accelerated efforts toward electrification and connected vehicle services are set to boost prospects.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for PCAR’s 2022 and 2023 earnings suggests year-over-year growth 53.2% and 3%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 12.6%.
CNH Industrial: CNH Industrial is a leading equipment and services company 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.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for CNHI’s 2022 and 2023 earnings suggests year-over-year growth 9% and 10.3%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 18.8%.
Sociedad Quimica: Headquartered in Chile, the company produces and distributes lithium and its derivatives. SQM is gaining from favorable trends in the lithium market underpinned by strong electric vehicle sales. The expansion of lithium operations is supporting the company’s lithium sales volumes. Strong demand and limited supply are boosting lithium prices, driving the firm’s top line.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for SQM’s 2022 and 2023 earnings suggests year-over-year growth 540% and 17%, respectively. The company surpassed estimates in three of the four trailing four quarters and missed once, the average surprise being 37.4%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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 Picks to Tide Over the Rising Rate Milieu
In the last couple of years, inflation has soared to 40-year highs, thanks to the deadly pandemic, disrupted supply chain systems and the Russia-Ukraine war. To combat the stubborn inflation, the Federal Reserve adopted a contractionary monetary policy stance. While Fed’s aggressive rate hikes are helping to cool down inflation gradually (as evident by the latest CPI reading), it remains near a 40-year high. However, it has declined from the peak of 9.1% attained in June. Per the latest data, consumer prices rose 7.1% year over year in November, down from 7.7% in October. Despite the encouraging data, the Fed seems to be in no mood to ease its fight against inflation just yet.
Yesterday, the Fed jacked up interest rates by 50 bps, breaking the string of four consecutive 75 bps point hikes but marking the seventh rate hike this year. That raised the Fed’s benchmark rate to a range of 4.25-4.5% — the highest rate in 15 years.
A 50-bps interest rate hike was very much expected. But what didn’t go down well with the market participants was the fact that there would be further rate hikes ahead and no cuts till 2024. The central banks signaled to keep the interest rates higher for longer through 2023. Fed Chair Powell said, “The inflation data received so far in October and November show a welcome reduction in the pace of price increases, but it will take substantially more evidence to give confidence inflation is on a sustained downward path.”
The FOMC still has a long way to go to rein in inflation and the economy isn't out of the woods just yet. Notably, the FOMC has lowered its GDP growth projection for 2023 from 1.2% to 0.5%. As such, market volatility is here to stay.
Focus on Value Investing
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 — U.S. Silica Holdings , PACCAR (PCAR - Free Report) , CNH Industrial and Sociedad Quimica Y Minera (SQM - Free Report) .
Is Earnings Yield a Better Alternative to P/E?
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 — the inverse of the P/E ratio. Firms with higher earnings yield are considered underpriced, while those with lower earnings yield are seen as overpriced. Earnings yield captures both the tangible and intangible yield of a firm, as opposed to dividend yield, which only considers the tangible yield.
It should be noted that earnings yield is an important tool for investors with exposure to both stocks and bonds. In fact, with regard to this, earnings yield can be more illuminating than the traditional P/E ratio, as the former facilitates the comparison of stocks with fixed-income securities. For instance, when the yield of the market index is more than the 10-year Treasury yield, stocks can be considered as undervalued than bonds. In this situation, investing in the stock market would be a better option for a value investor.
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 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.
Our Picks
Here we discuss four of the 119 stocks that qualified the screen:
U.S. Silica: Based in Maryland, Silica Holdings makes and markets commercial silica, a specialized mineral, to a variety of attractive end markets in the United States. U.S. Silica should gain from its expansion actions in the Permian Basin. The Sandbox and EP Minerals buyouts are also expected to make a meaningful contribution.
The company currently sports a Zacks Rank #1 and has a Value Score of A. The Zacks Consensus Estimate for SLCA’s 2022 and 2023 earnings suggests year-over-year growth 342% and 64%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 48.2%.
PACCAR: PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The new DAF lineup, comprising XF, XG and XD models, augurs well. New product launches are set to translate into an improved mix in 2023. PCAR's accelerated efforts toward electrification and connected vehicle services are set to boost prospects.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for PCAR’s 2022 and 2023 earnings suggests year-over-year growth 53.2% and 3%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 12.6%.
CNH Industrial: CNH Industrial is a leading equipment and services company 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.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for CNHI’s 2022 and 2023 earnings suggests year-over-year growth 9% and 10.3%, respectively. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 18.8%.
Sociedad Quimica: Headquartered in Chile, the company produces and distributes lithium and its derivatives. SQM is gaining from favorable trends in the lithium market underpinned by strong electric vehicle sales. The expansion of lithium operations is supporting the company’s lithium sales volumes. Strong demand and limited supply are boosting lithium prices, driving the firm’s top line.
The company currently sports a Zacks Rank #1 and has a Value Score of B. The Zacks Consensus Estimate for SQM’s 2022 and 2023 earnings suggests year-over-year growth 540% and 17%, respectively. The company surpassed estimates in three of the four trailing four quarters and missed once, the average surprise being 37.4%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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