Year to date, the S&P 500 index has gained an impressive 17%. The U.S. economy has remained remarkably resilient despite the Fed’s most aggressive tightening campaign in decades. As the Fed gears up for its two-day FOMC meeting starting on Sep 19, the majority of investors anticipate no change in interest rates, even though recent indicators might suggest the need for action.
The U.S. annual inflation rate took an upward trajectory for the second consecutive month, reaching 3.7% in August from July’s 3.2%. This acceleration can be largely attributed to escalating oil prices as prominent oil-producing giants, Saudi Arabia and Russia, have prolonged their supply cuts till December 2023. With oil prices hovering around a 10-month high level, we expect future upward pressure on inflation.
Further complicating the economic landscape is the stand taken by Shawn Fain, United Auto Workers’ president. He has called for a simultaneous strike across the Big 3 automakers, championing a substantial pay rise of approximately 40% for UAW union workers. Such a move has the potential to significantly disrupt the automotive industry for an extended period.
With inflation consistently overshooting its 2% annual target, the Fed, surprisingly, is predicted to remain passive at its upcoming meeting. Although the probability of a rate hike in this session is a mere 5%, speculations indicate a 40% chance of a rate hike in their November meeting. Given the interplay of domestic labor disputes and international oil supply constraints, the Federal Reserve might find itself compelled to introduce tighter measures in the near future to ensure a balanced economic equilibrium.
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 Abercrombie & Fitch ANF, LSI Industries LYTS, GigaCloud Technology GCT and Solaris Oilfield Infrastructure SOI 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.
Here we discuss four of the 33 stocks that qualified the screening:
Abercrombie & Fitch operates as a specialty retailer of premium, high-quality casual apparel for men, women and kids. The Zacks Consensus Estimate for ANF’s current fiscal earnings and sales implies year-over-year growth of 1,644% and 10.4%, respectively. Estimates for fiscal 2024 and 2025 earnings per share have moved up by $2.27 and $1.94, respectively, over the past 30 days. ANF currently sports a Zacks Rank #1 and has a Value Score of A.
LSI Industries produces and sells non-residential lighting and retail display solutions. The Zacks Consensus Estimate for LYTS’s current fiscal year earnings and sales implies year-over-year growth of 27.3% and 4.2%, respectively. EPS estimates for fiscal 2024 and 2025 have moved up by 18 cents and 35 cents, respectively, over the past 30 days. LSI Industries currently sports a Zacks Rank #1 and has a Value Score of A.
GigaCloud provides end-to-end B2B e-commerce solutions for big parcel merchandise worldwide. The Zacks Consensus Estimate for GCT’s current fiscal year earnings and sales implies year-over-year growth of 158.3% and 22.5%, respectively. EPS estimates for 2023 and 2024 earnings per share have moved up by 16 cents and 10 cents, respectively, over the past 60 days. GigaCloud currently sports a Zacks Rank #1 and has a Value Score of A.
Solaris Oilfield 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 360 days. Solaris Oilfield currently sports a Zacks Rank #1 and has a Value Score of B.
Abercrombie & Fitch Company (ANF): Free Stock Analysis Report
This article originally appeared on Zacks
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.