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4 High Earnings Yield Value Bets as Recession Fears Resurface
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U.S. stocks saw steep declines on Monday, with the Nasdaq and S&P 500 each falling roughly 3%, continuing last week's sell-off amid renewed recession concerns. Multiple bearish catalysts triggered this massive selloff and the market volatility is expected to persist in the near term.
In this uncertain environment, value investing emerges as a prudent strategy. Investors can invest in high earnings yield value stocks like Western Digital (WDC - Free Report) , PDD Holdings (PDD - Free Report) , Pfizer (PFE - Free Report) and Barrick Gold (GOLD - Free Report) to reap significant rewards. Before discussing the stocks and the earnings yield metric, let's examine what triggered the Wall Street sell-off.
What Led to the Dramatic Correction?
An unexpectedly weak U.S. employment report, featuring a post-pandemic peak in the jobless rate, reignited recession worries. The economy added only 114,000 jobs in July, far below the expected 175,000 and a sharp decline from June's revised 179,000. The unemployment rate rose to 4.3% from 4.1%, its highest level since October 2021, reflecting a concerning reversal in labor market dynamics.
Additionally, a contraction in the manufacturing sector exacerbated fears. The recent data from the Institute for Supply Management revealed that U.S. manufacturing activity hit an eight-month low in July due to a slump in new orders.
Furthermore, the Bank of Japan's shift to a hawkish monetary policy introduced another complication. The unwinding of carry trades, where investors borrow from low-interest economies like Japan to fund bets in high-yield assets, also contributed to market weakness.
Investors are increasingly concerned that the U.S. economy is slowing down more quickly. Notably, economists at Goldman Sachs have raised the likelihood of a U.S. recession within the next year to 25%, up from the previous estimate of 15%.
How Should You Play the Market Amid Uncertainty?
The mantra "be greedy when others are fearful" is well-known, but many investors hesitate when it's time to act. Despite the current market environment, this could be a buying opportunity. Value investing, a time-tested strategy, involves buying stocks that seem undervalued compared to their intrinsic values. These stocks often offer steady dividend payouts, providing safety during uncertain times.
The Strength of Earnings Yield
One valuable metric for identifying attractively valued stocks is earnings yield. Expressed as a percentage, it is calculated as annual earnings per share (EPS) divided by the market price. This ratio measures the anticipated return from earnings for each dollar invested in a stock today.
When comparing stocks, those with higher earnings yields are generally considered undervalued, while those with lower yields are seen as overpriced. Unlike the traditional P/E ratio, earnings yield also facilitates comparisons with fixed-income securities. Investors often compare a stock's earnings yield to prevailing interest rates, such as the 10-year Treasury yield, to gauge the stock's return relative to virtually risk-free bonds.
If a stock's yield is lower than the 10-year Treasury yield, it is considered overvalued compared to bonds. Conversely, if the stock's yield is higher, it is deemed undervalued. Thus, for value investors, the stock market presents a better investment opportunity if the earnings yield exceeds the Treasury yield.
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.
Here we discuss four of the 43 stocks that qualified the screen:
Western Digital: The Zacks Consensus Estimate for this digital storage solutions specialist’s current fiscal sales and earnings implies 36.2% and 4,430% growth, respectively, on a year-over-year basis. The consensus mark for current and next fiscal’s EPS has been revised upward by 7 cents and $3.16, respectively, over the past seven days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 65%. WDC currently sports a Zacks Rank #1 and has a Value Score of B.
PDD Holdings: The Zacks Consensus Estimate for this multinational e-commerce company’s 2024 sales and earnings implies 62.4% and 87.8% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has been revised upward by 14 cents and 20 cents, respectively, over the past 60 days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 45.6%. PDD currently sports a Zacks Rank #1 and has a Value Score of B.
Pfizer: The Zacks Consensus Estimate for this pharmaceutical giant’s 2024 sales and EPS implies 5.3% and 40% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has moved north by 19 cents and 8 cents, respectively, over the past seven days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 70%. PFE currently carries a Zacks Rank #2 and has a Value Score of A.
Barrick: The Zacks Consensus Estimate for this prominent gold producer’s 2024 sales and EPS implies 13.2% and 38.1% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has moved north by 8 cents and 12 cents, respectively, over the past 30 days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 18.3%. GOLD 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 Bets as Recession Fears Resurface
U.S. stocks saw steep declines on Monday, with the Nasdaq and S&P 500 each falling roughly 3%, continuing last week's sell-off amid renewed recession concerns. Multiple bearish catalysts triggered this massive selloff and the market volatility is expected to persist in the near term.
In this uncertain environment, value investing emerges as a prudent strategy. Investors can invest in high earnings yield value stocks like Western Digital (WDC - Free Report) , PDD Holdings (PDD - Free Report) , Pfizer (PFE - Free Report) and Barrick Gold (GOLD - Free Report) to reap significant rewards. Before discussing the stocks and the earnings yield metric, let's examine what triggered the Wall Street sell-off.
What Led to the Dramatic Correction?
An unexpectedly weak U.S. employment report, featuring a post-pandemic peak in the jobless rate, reignited recession worries. The economy added only 114,000 jobs in July, far below the expected 175,000 and a sharp decline from June's revised 179,000. The unemployment rate rose to 4.3% from 4.1%, its highest level since October 2021, reflecting a concerning reversal in labor market dynamics.
Additionally, a contraction in the manufacturing sector exacerbated fears. The recent data from the Institute for Supply Management revealed that U.S. manufacturing activity hit an eight-month low in July due to a slump in new orders.
Furthermore, the Bank of Japan's shift to a hawkish monetary policy introduced another complication. The unwinding of carry trades, where investors borrow from low-interest economies like Japan to fund bets in high-yield assets, also contributed to market weakness.
Investors are increasingly concerned that the U.S. economy is slowing down more quickly. Notably, economists at Goldman Sachs have raised the likelihood of a U.S. recession within the next year to 25%, up from the previous estimate of 15%.
How Should You Play the Market Amid Uncertainty?
The mantra "be greedy when others are fearful" is well-known, but many investors hesitate when it's time to act. Despite the current market environment, this could be a buying opportunity. Value investing, a time-tested strategy, involves buying stocks that seem undervalued compared to their intrinsic values. These stocks often offer steady dividend payouts, providing safety during uncertain times.
The Strength of Earnings Yield
One valuable metric for identifying attractively valued stocks is earnings yield. Expressed as a percentage, it is calculated as annual earnings per share (EPS) divided by the market price. This ratio measures the anticipated return from earnings for each dollar invested in a stock today.
When comparing stocks, those with higher earnings yields are generally considered undervalued, while those with lower yields are seen as overpriced. Unlike the traditional P/E ratio, earnings yield also facilitates comparisons with fixed-income securities. Investors often compare a stock's earnings yield to prevailing interest rates, such as the 10-year Treasury yield, to gauge the stock's return relative to virtually risk-free bonds.
If a stock's yield is lower than the 10-year Treasury yield, it is considered overvalued compared to bonds. Conversely, if the stock's yield is higher, it is deemed undervalued. Thus, for value investors, the stock market presents a better investment opportunity if the earnings yield exceeds the Treasury yield.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Picks
Here we discuss four of the 43 stocks that qualified the screen:
Western Digital: The Zacks Consensus Estimate for this digital storage solutions specialist’s current fiscal sales and earnings implies 36.2% and 4,430% growth, respectively, on a year-over-year basis. The consensus mark for current and next fiscal’s EPS has been revised upward by 7 cents and $3.16, respectively, over the past seven days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 65%. WDC currently sports a Zacks Rank #1 and has a Value Score of B.
PDD Holdings: The Zacks Consensus Estimate for this multinational e-commerce company’s 2024 sales and earnings implies 62.4% and 87.8% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has been revised upward by 14 cents and 20 cents, respectively, over the past 60 days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 45.6%. PDD currently sports a Zacks Rank #1 and has a Value Score of B.
Pfizer: The Zacks Consensus Estimate for this pharmaceutical giant’s 2024 sales and EPS implies 5.3% and 40% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has moved north by 19 cents and 8 cents, respectively, over the past seven days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 70%. PFE currently carries a Zacks Rank #2 and has a Value Score of A.
Barrick: The Zacks Consensus Estimate for this prominent gold producer’s 2024 sales and EPS implies 13.2% and 38.1% growth, respectively, on a year-over-year basis. The consensus mark for 2024 and 2025 EPS has moved north by 8 cents and 12 cents, respectively, over the past 30 days. The company surpassed earnings estimates in each of the trailing four quarters, the average surprise being 18.3%. GOLD 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.