5 High Earnings Yield Value Picks to Maximize Returns
After having a dream rally in the first half of 2023, all three major indices of the U.S. stock market are poised to close higher in July. That would make it five months in a row for the S&P and Nasdaq, and four out of the last five months for the Dow. This positive performance indicates robust market sentiment and sustained investor confidence.
One area of concern for investors was the potential impact of earnings on market stability. However, these concerns have been alleviated as the overall earnings picture appears stable and resilient. Despite fears of a deteriorating outlook, negative guidance and lowered estimates, the prevailing tone and substance of guidance and management commentary have been encouraging.
Last week's FOMC announcement went off as expected. The Federal Reserve raised interest rates by a quarter-percentage point, marking the 11th rate increase in more than a year. The rate hike brought the benchmark interest rate, the federal funds rate, to 5.25-5.50%, the highest level since March 2001. Nonetheless, the Fed has signaled the possibility of further increases ahead.
On a positive note, inflation in the United States cooled down for the 12th consecutive month in June, with the Consumer Price Index rising 3% year over year — the lowest rate since early 2021. Although inflation has dropped from a peak of 9.1%, it has still not met the Federal Reserve's 2% target, indicating room for improvement.
So, interest rates may remain a pain point for investors. Amid these economic indicators, recessionary fears seem to have subsided but investors are mindful that the Federal Reserve might not be finished with raising interest rates to further control inflation. Wall Street remains watchful of the possibility of a short-term interest rate increase of at least 25 basis points later in the year.
Focus on Value Investing
In this complex and ever-changing landscape for investors, adopting a value investing approach could prove to be strategically advantageous. Value investing focuses on identifying undervalued assets that have strong fundamentals and long-term growth potential. This investment approach is rooted in the belief that the market sometimes misprices stocks, presenting opportunities for prudent investors.
By emphasizing the relevance of value investing in the current market conditions, investors can seek to make informed and prudent investment decisions that align with their financial goals and risk appetite. As market dynamics continue to evolve, a value-driven strategy can provide stability and resilience amid uncertainties, ensuring a well-rounded investment portfolio.
Use Earnings Yield to Unlock Value
Earnings yield is a financial ratio that calculates a company's earnings relative to its market price, expressed as a percentage. A higher earnings yield suggests an undervalued stock with greater return potential, while a lower yield indicates potential overvaluation. Value investors use this metric to identify promising stocks. A high earnings yield implies that a company's earnings are relatively high compared to its market price, indicating an undervalued stock. Conversely, a low earnings yield suggests that the stock may be overvalued.
However, other factors like competitive advantage, financial stability and growth prospects must also be considered. Earnings yield can be used to compare market index performance with the 10-year Treasury yield, guiding value investors toward stocks when the market index yield surpasses the bond yield. This ratio offers valuable insights, especially when comparing stocks to fixed-income securities, making it a powerful tool for investors with exposure to both stocks and bonds. By integrating earnings yield into their investment approach, value investors can discover hidden opportunities and position themselves for success in the dynamic market.
Mr. Cooper Group COOP, Hello Group Inc. MOMO, Livent Corporation LTHM, DXP Enterprises, Inc. DXPE and Dave & Buster's Entertainment PLAY are a few top high earnings yield picks for value investors.
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 five of the 29 stocks that qualified the screen:
Mr. Cooper provides quality servicing, origination and transaction-based services principally to single-family residences, primarily in the United States. The Zacks Consensus Estimate for COOP’s 2023 and 2024 earnings implies year-over-year growth of 174.8% and 30%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by $1.03 and $1.34, respectively, over the past seven days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Hello Group is a China-based technology company that operates mobile apps for dating and finding friends nearby. The Zacks Consensus Estimate for MOMO’s 2023 and 2024 earnings implies year-over-year growth of 27% and 12%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 11 cents and 14 cents, respectively, over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Livent is a lithium firm that produces high-quality finished lithium compounds, with manufacturing sites in the United States, England, China and Argentina. The Zacks Consensus Estimate for LTHM’s 2023 and 2024 earnings implies year-over-year growth of 51% and 26%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 6 cents each, over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
DXP Enterprises provides innovative pumping solutions, supply-chain services as well as maintenance, repair, operating and production services. The Zacks Consensus Estimate for DXPE’s 2023 and 2024 earnings implies year-over-year growth of 44% and 7%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by $1.33 and $1.35, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
Dave & Buster's Entertainment is a leading owner and operator of high-volume venues in North America, combining dining and entertainment for both adults and families. The Zacks Consensus Estimate for PLAY’s fiscal 2024 and 2025 earnings implies year-over-year growth of 29% and 22%, respectively. Estimates for 2023 and 2024 earnings per share have moved up by 4 cents each, over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
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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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DXP Enterprises, Inc. (DXPE) : Free Stock Analysis Report
Dave & Buster's Entertainment, Inc. (PLAY) : Free Stock Analysis Report
Hello Group Inc. Sponsored ADR (MOMO) : Free Stock Analysis Report
MR. COOPER GROUP INC (COOP) : Free Stock Analysis Report
Livent Corporation (LTHM) : Free Stock Analysis Report
