4 High Earnings Yield Stocks to Navigate the Market Uncertainty
The recent release of the minutes from the FOMC meeting underscores the ongoing battle against inflation. With the labor market remaining tight and inflation exceeding the Committee's target, the minutes emphasized the potential for further tightening of monetary policy.
Specifically, the minutes summary read, "With inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy."
The latest 25 basis points increase elevated the Fed's key borrowing level to a range between 5.25% to 5%, marking its highest point in over two decades. While some voices within the Fed have expressed doubts about the necessity of more rate hikes, the minutes reflect a sense of caution. The report highlighted the need for a sufficiently restrictive monetary policy to bring inflation back to the desired 2% objective.
The use of terms like “upside risk” and “sufficiently restrictive” implies a considerable likelihood of at least one more rate hike before the year's end. Additionally, Moody's downgrade of several major lenders and the scrutiny of six banks for potential downgrades have fueled concerns about the economy's health and stability.
Play Value Investing Using Earnings Yield Metric
In this uncertain landscape, value investing is one of the most prudent strategies. Value investing centers on identifying undervalued assets that have the potential for growth over the long term. Amid the volatility induced by monetary policy shifts and credit rating concerns, seeking out fundamentally strong companies with sound financials and a history of resilience can provide a shield against market turbulence. The value investing 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.
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 (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 DMC Global Inc. BOOM, Commercial Vehicle Group CVGI, Solaris Oilfield Infrastructure SOI and Axis Capital Holdings AXS to fetch handsome long-term rewards.
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 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 26 stocks that qualified the screen:
DMC Global: Based in Colorado, this technology company operates in sectors like industrial infrastructure and oilfield products and services. The Zacks Consensus Estimate for BOOM’s 2023 and 2024 earnings implies year-over-year growth of 200% and 26%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 24 cents and 25 cents, respectively, over the past seven days. DMC Global currently sports a Zacks Rank #1 and has a Value Score of A.
Commercial Vehicle: Based in Ohio, this company supplies interior systems, vision safety solutions and other cab-related products for the global commercial vehicle market, the construction market and other specialized transportation markets. The Zacks Consensus Estimate for CVGI’s 2023 and 2024 earnings implies year-over-year growth of 102% and 12%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 8 cents and 6 cents, respectively, over the past 30 days. Commercial Vehicle currently sports a Zacks Rank #1 and has a Value Score of A.
Solaris Oilfield: Based in Houston, this company provides patented mobile proppant management systems that unload, store and deliver proppant at oil and natural gas well sites. The Zacks Consensus Estimate for SOI’s 2023 and 2024 earnings implies year-over-year growth of 25% and 105%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 9 cents and 18 cents, respectively, over the past 30 days. Solaris Oilfield currently sports a Zacks Rank #1 and has a Value Score of B.
Axis Capital: Based in Bermuda, this company provides a broad range of specialty insurance and reinsurance solutions to its clients on a worldwide basis. The Zacks Consensus Estimate for AXS’s 2023 and 2024 earnings implies year-over-year growth of 41.5% and 13.3%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 4 cents and 14 cents, respectively, over the past seven days. Axis Capital currently sports a Zacks Rank #1 and has a Value Score of B.
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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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Axis Capital Holdings Limited (AXS) : Free Stock Analysis Report
Commercial Vehicle Group, Inc. (CVGI) : Free Stock Analysis Report
DMC Global (BOOM) : Free Stock Analysis Report
Solaris Oilfield Infrastructure, Inc. (SOI) : Free Stock Analysis Report
