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4 High Earnings Yield Picks in Focus as Fed Turns Less Hawkish

Markets had been waiting with bated breath for Fed Chair Jerome Powell’s speech at the Brookings Institution on Wednesday for cues related to the duration and extent of tightening of monetary policy. Powell’s speech didn’t push the hawkish ball forward. The Fed was seen tilting slight dovish as it indicated smaller interest rate increases ahead, which fueled a rally across major equity indices yesterday.

Last month, the CPI signaled that inflation is rising but lesser than expected. And yesterday, Powell set the stage for a 50 basis-point (bp) rate hike at its December meeting instead of the 75 bps we’ve seen in each of the past four Fed meetings. Even though Powell stated that the central bank would scale back the pace of its rate hikes as soon as December, he still feels that the fight against inflation is hardly over.

Powell said, “we have a long way to go in restoring price stability.” He cautioned that the contractionary monetary policy will continue for some time until real signs of progress emerge on inflation data. As such, while Powell is in no hurry to pivot toward lowering rates anytime soon, he is also not interested in the Fed dragging the economy into recession.

While Powell’s comment provided a boost to markets yesterday, this relief rally is likely to be short term as inflation is far from over. A 50-bps hike in mid-December would raise the Fed Funds Target range to 4.25-4.50%. It remains to be seen where the Fed goes from there.

Value Investing Should Still Be the Way Forward

Until inflation remains high and key questions are left unanswered, including how long the Fed will stay on course with its rate hikes, economic uncertainty looms. Markets aren’t likely to meaningfully turn the corner anytime soon and volatility will persist.

Investors should stay focused on value investing and ferret out fundamentally strong companies that are trading at a discount now. With economic reopening gaining traction, now is the time for them to flourish on beaten-down valuation. The value investing approach seeks to profit from investing in stocks that appear to be trading at a discount to their intrinsic values. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies.Certainly, the value investment strategy best suits investors with a long-term horizon.

Unlock Your Portfolio Value With High Earnings Yield Stocks

One interesting ratio that you can consider for picking attractively valued stocks is earnings yield. The ratio is the inverse of the price-to-earnings (P/E) ratio and 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, with other factors remaining constant.

Earnings Yield, in fact, has the edge over the popular P/E ratio as the former facilitates the comparison of the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered undervalued in comparison to bonds and vice versa. In such a situation, for value investors, investing in the stock market may be a better option than the bond market.

However, it is important to remember that T-bills are risk-free, while stock investments come with a caveat. It would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall market.

CNH Industrial CNHI, Silica Holdings, Inc. SLCA, Helmerich & Payne Inc. HP and United Rentals, Inc. URI are a few high earnings yield value picks that can fetch handsome rewards.

Picking the Right Way

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 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.

4 Stocks to Buy

Below we have highlighted four of the 106 stocks that made it through the screen:

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 earnings suggests year-over-year growth 9%. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 18.8%.

Silica Holdings: 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 VGM Score of A. The Zacks Consensus Estimate for SLCA’s 2022 earnings suggests year-over-year growth 342%. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 48.2%.

Helmerich & Payne: Helmerich & Payne is engaged in the contract drilling of oil and gas wells in the United States and internationally. The company’s technologically-advanced FlexRigs can maintain relatively strong daily-rate margins, giving the firm an edge over its peers.

The company currently sports a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate for HP’s fiscal 2023 earnings implies year-over-year growth 4,180%. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 124.2%.

United Rentals: United Rentals is the largest equipment rental company in the world. This company has been gaining from better fleet productivity on broad-based rental demand in construction and industrial verticals.

The company currently sports a Zacks Rank #2 and has a VGM Score of A. The Zacks Consensus Estimate for URI’s 2022 earnings suggests year-over-year growth 47.3%. The company surpassed estimates in each of the four trailing four quarters, the average surprise being 9.5%.

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.

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DisclosureOfficers, 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 athttps://www.zacks.com/performance.

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