Leverage Value Investing Opportunities Amid Fed's Hawkish Pause
The Federal Reserve has hit the pause button on interest rate hikes for now, in a move that was largely anticipated by the markets. This decision came after 10 consecutive hikes in 15 months, marking the fastest series of increases in four decades. Leaving the Fed Funds rate unchanged from the last meeting at 5.00-5.25% (midpoint of 5.13%), inflation is now way below its peak but still well above the Fed’s 2% target. Jerome Powell noted that conditions necessary to bring down inflation are starting to take shape. Factors such as slowing wage growth and a cooling job market are expected to reduce inflationary pressure over time. However, the Fed's stance does not rule out the possibility of future rate hikes.
The Fed’s move is being characterized as a "hawkish pause," meaning that while the Fed is not raising rates at this time, it remains vigilant and is ready to act aggressively, if necessary, to prevent inflation from getting out of control. In fact, the FOMC projects as many as two additional quarter-point rate hikes before the year ends. However, Powell emphasized that the Fed intends to move at a more moderate pace than last year.
The immediate market response to the news was a dip in stock prices. But markets rebounded briefly after encouraging remarks about the fight against inflation. Moving forward, investors should be prepared for increased market volatility as the Fed's future actions and economic reports could trigger significant market reactions.
Focus on Value Investing
While the Fed's decision to pause the rate hikes may bring a temporary respite, the possibility of future increases cannot be ruled out. In such a scenario, adopting a value investing approach could help investors navigate the financial market turbulence.
Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. This approach is built on the idea that the market overreacts to good and bad news, resulting in stock price movements that do not reflect a company's long-term fundamentals.
In an environment where interest rates are high and potentially rising, companies with solid fundamentals, healthy balance sheets, and a steady cash flow become even more attractive. Such companies, often the target of value investors, are likely to withstand economic pressure better than their overvalued counterparts.
Value investing, with its focus on long-term capital appreciation and focus on the safety of the principal, could be a suitable approach in these uncertain times. The key is to stay focused on individual company fundamentals, look for inherent value and have the patience to wait for the market to recognize this value.
Play on Earnings Yield Strength
One of the most common valuation metrics to pick undervalued stocks with solid upside potential is the P/E ratio. However, there’s another interesting ratio that you can consider for ferreting out attractively valued stocks and that is earnings yield. One could invest in high earnings yield stocks like Loma Negra Compañía Industrial Argentina Sociedad Anónima LOMA, Dave & Buster's Entertainment PLAY, Wabash National Corporation WNC, TransAlta Corporation TAC and Copa Holdings, S.A. CPA to fetch handsome long-term rewards.
Earnings yield is useful for investors concerned about the rate of return on investment. 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.
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 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 30 stocks that qualified the screen:
Loma Negra is a cement manufacturer, focusing on the production and commercialization of cement, masonry cement, aggregates, concrete and lime. The Zacks Consensus Estimate for LOMA’s 2023 earnings implies year-over-year growth of 784.6%. Estimates for 2023 and 2024 earnings per share have moved up by 18 cents and 25 cents, respectively, over the past 60 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
Dave & Buster’s owns and operates entertainment and dining venues for adults and families in North America. The Zacks Consensus Estimate for PLAY’s current fiscal earnings implies year-over-year growth of 24.3%. Estimates for current and next fiscal earnings per share have moved up by 16 cents and 13 cents, respectively, over the past seven days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Wabash designs, manufactures, and services products such as dry freight and refrigerated trailers, tank trailers, dry and refrigerated truck bodies, trailer aerodynamic solutions, and much more. The Zacks Consensus Estimate for WNC’s 2023 earnings implies year-over-year growth of 90.7%. Estimates for 2023 and 2024 earnings per share have moved up by $1.39 and 45 cents, respectively, over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
TransAlta is an energy company involved in the development, production and sale of electric energy in Canada and the United States. The Zacks Consensus Estimate for TAC’s 2023 earnings implies a whopping year-over-year growth of 1,325%. Estimates for 2023 earnings per share have moved up by 33 cents over the past 60 days. The stock currently flaunts a Zacks Rank #1 and has a Value Score of A.
Copa Holdings provides airline passenger and cargo services. The Zacks Consensus Estimate for CPA’s 2023 earnings implies year-over-year growth of 79.4%. Estimates for 2023 and 2024 earnings per share have moved up by 33 cents and 24 cents, respectively, over the past seven days. The stock currently flaunts 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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TransAlta Corporation (TAC) : Free Stock Analysis Report
Copa Holdings, S.A. (CPA) : Free Stock Analysis Report
Wabash National Corporation (WNC) : Free Stock Analysis Report
Dave & Buster's Entertainment, Inc. (PLAY) : Free Stock Analysis Report
Loma Negra Compania Industrial Argentina S.A. Sponsored ADR (LOMA) : Free Stock Analysis Report
