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5 High Earnings Yield Picks Amid Fed's Aggressive Action

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·7 min read
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Wall Street has been on a choppy ride since the start of 2022. Valuations have been slashed, and bears have had the upper hand. Sky-high inflation, geopolitical tensions between Russia and Ukraine, severe supply chain snarls and rising interest rates worries are weighing on the global economy currently. Raging inflation (at a 41-year high level) is largely responsible for the economic and market angst.

Despite the Fed raising interest rates by 25 bps in March and 50 bps in May, the efforts just don’t seem enough, with inflation at levels we haven’t seen in decades. Amid this stubborn inflationary pressure, the Fed has been forced to become more aggressive and hiked interest rates by 75 bps yesterday, the highest increase since 1994. Fed expects less near-term relief from inflation and signaled that it would keep increasing interest rates aggressively in the remaining four FOMC meetings in 2022. The Fed officials predicted the benchmark rate to end the year at 3.4%.As for growth, they see GDP at 1.7% for full-year 2022, down from their previous projection of 2.8%.

Focus on Value Investing With High Earnings Yield Stocks

During times of market weakness, investors might be tempted to resort to panic selling. Contrarily, they should focus on value investing and ferret out fundamentally strong companies that are trading at a discount now. 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 its intrinsic value to reflect the actual fundamentals.

One interesting ratio that you can consider for picking 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 one with higher earnings yield is considered undervalued, while those with lower earnings yield are seen as overpriced.

Cheniere Energy LNG, Nutrien Ltd. NTR, Imperial Oil Ltd. IMO, ON Semiconductor Corporation ON and Silgan Holdings Inc SLGN are a few high earnings yield value picks that can fetch handsome rewards.

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.

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 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 are the five of the 132 stocks that made it through the screen:

Cheniere Energy: Houston-based Cheniere Energy is a leading producer of liquified natural gas or LNG.  With its first-mover advantage in exporting LNG from the United States, Cheniere Energy is primed for significant revenue and earnings growth on the back of solid operations and long-term contracts. The firm’s gas supply deals for its Sabine Pass and Corpus Christi projects offer excellent cash flow visibility for the coming years.

The Zacks Consensus Estimate for Cheniere Energy’s 2022 sales and earnings implies year-over-year growth of 81.3% and 267.5%, respectively. The consensus mark for EPS has moved north by 40% over the past 60 days.  The stock currently sports a Zacks Rank #1 and has a VGM Score of B.

Nutrien: Canada-based Nutrien is a leading integrated provider of crop inputs and services. Nutrien is well placed to benefit from solid demand and higher prices for fertilizers, supported by the strength in global agriculture markets. It is expected to gain from strong potash sales volumes on the back of solid domestic and overseas demand.Strategic acquisitions, cost efficiency, and increased adoption of its digital platform also augur well for NTR’s prospects.

The Zacks Consensus Estimate for Nutrien’s 2022 sales and earnings implies year-over-year growth of 48% and 175%, respectively. The consensus mark for EPS has moved north by 30.7% over the past 60 days.  The stock currently sports a Zacks Rank #1 and has a Value Score of B.

Imperial Oil: Calgary-based Imperial Oil is one of the largest integrated oil companies in Canada.Strong execution and ramped-up activities in Kearl, Cold Lake and Syncrude projects position the company for solid production growth and are expected to augment its revenues and earnings going forward. Imperial Oil's strong balance sheet, ability to generate cash flow and a shareholder-friendly policy should also favor the stock.

The Zacks Consensus Estimate for Imperial Oil’s 2022 sales and earnings implies year-over-year growth of 82% and 177.3%, respectively. The consensus mark for EPS has moved north by 38.4% over the past 60 days.  The stock currently sports a Zacks Rank #1 and has a VGM Score of B.

ON Semiconductor: Headquartered in Arizona, ON Semiconductor aka onsemi is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components.The chip maker, originally a spin-off of Motorola in the late 1990s, is driving growth by supplying its offerings to areas such as electric vehicles, industrial automation, and beyond.Its highly differentiated power management solutions have enabled it to generate new design wins and market share gains.

The Zacks Consensus Estimate for onsemi’s 2022 sales and earnings implies year-over-year growth of 19% and 66.4%, respectively. The consensus mark for EPS has moved north by 17.5% over the past 60 days.  The stock currently sports a Zacks Rank #2 and has a VGM Score of A.

Silgan: Stamford-based Silgan is a leading supplier of rigid packaging for consumer goods products. The companyis benefiting from the strong demand in beauty, fragrance, food and beverage markets. Apart from this, manufacturing improvement efforts and capacity expansions have been driving growth. SLGN has also been active on the acquisition front over the past few years, which will help the company generate attractive cash returns in the near term.

The Zacks Consensus Estimate for Silgan’s 2022 sales and earnings implies year-over-year growth of 17.5% and 16.2%, respectively. The consensus mark for EPS has moved north by 2.6% over the past 60 days.  The stock 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.

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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