Inflation has been at the forefront of the Federal Reserve's economic challenges since the beginning of 2022. The Federal Open Market Committee (FOMC) implemented significant changes in the U.S. monetary policy to rein in inflation toward its long-term goal of 2%. In July, the FOMC jacked up interest rate by 25 bps, marking its 11th hike since March 2022.
At its last meeting, the Fed maintained interest rates at a range of 5.25-5.5% for the second consecutive time. This suggests a cautious approach as officials assess inflation trends to determine if the current monetary policy is sufficiently stringent.
A key indicator, the Consumer Price Index (CPI), showed a rise of 3.2% in October, down from September's 3.7% and slightly below the 3.3% increase projected by economists. Moreover, the CPI remained unchanged from September to October, against expectations of a 0.1% rise. The latest reading suggests that inflation might be moving in the right direction, sparking optimism among investors that the Federal Reserve might not implement further rate hikes in the current cycle.
However, Fed Chair Jerome Powell expressed doubts about whether the current level of monetary tightening is adequate to reduce inflation sustainably. This uncertainty places significant attention on the upcoming FOMC meeting on Dec 12-13, with investors eagerly awaiting any signals of future interest rate decisions.
Investors and analysts will be closely scrutinizing the minutes from the FOMC's November meeting, to be released today, to gain insights into the committee's perspectives on potential rate adjustments this year.
If you wish to unlock portfolio value in the current market dynamics, one of the most effective approaches could be value investing. To this end, Royal Caribbean Cruises Ltd. RCL, Resideo Technologies REZI, Travelzoo TZOO and Mr. Cooper Group Inc. COOP are a few value stocks with high earnings yield that are worth betting on.
Boost Portfolio Value Using Earnings Yield Metric
Value investing takes a long-term view and seeks to gauge the intrinsic value of companies based on their fundamental strength, earnings potential and financials. It aims to profit from investing in stocks that appear to be trading at a discount to their intrinsic values and eventually make handsome returns when stock prices rise toward that value, reflecting the actual fundamentals.
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.
Earnings yield is helpful 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 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 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.
Here are four of the 27 stocks that qualified for the screening:
Royal Caribbean has a dominant footprint in the contemporary, premium and deluxe segments of the cruise vacation industry. It owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. The stock currently sports a Zacks Rank #1 and a Value Score of B. The Zacks Consensus Estimate for RCL’s 2023 and 2024 earnings suggests year-over-year growth of 187% and 38.2%, respectively. Estimates for 2023 and 2024 earnings per share (EPS) have moved up by 42 cents and 70 cents, respectively, in the past 30 days.
Resideo provides critical comfort and security solutions primarily in residential environments and is a distributor of low-voltage and security products. The stock currently sports a Zacks Rank #1 and a Value Score of A. The Zacks Consensus Estimate for REZI’s 2024 sales and earnings indicates year-over-year growth of 2% and 23.6%, respectively. Estimates for 2023 and 2024 EPS have moved up by 77 cents and 33 cents, respectively, in the past 30 days.
Travelzoo is an internet media company that engages in the provision of information to subscribers and website users about travel, entertainment and local deals available from companies. The stock currently sports a Zacks Rank #1 and a Value Score of B. The Zacks Consensus Estimate for TZOO’s 2023 and 2024 earnings calls for year-over-year growth of 51% and 25%, respectively. Estimates for 2023 and 2024 EPS have moved up by 8 cents and 17 cents, respectively, in the past 30 days.
Mr. Cooper is one of the larger home loan servicers and mortgage providers in the United States.Among the consumer loans space, COOP is carving out its own niche, providing quality servicing, origination and transaction-based services to single-family residences. The stock currently sports a Zacks Rank #1 and a Value Score of A. The Zacks Consensus Estimate for COOP’s 2023 and 2024 earnings implies year-over-year growth of 225.6% and 14%, respectively. Estimates for 2023 and 2024 EPS have moved up by $1.05 and 21 cents, respectively, in the past 30 days.
You can get the rest of the stocks on this list by signing up now for a 2-week free trial of 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.
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.
Top 5 ChatGPT Stocks Revealed
Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion.
Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.