5 High Earnings Yield Picks for 2H to Beat the Market Blues

S&P 500 suffered the worst first half since 1962, with the index contracting close to 21% during the January-June 2022 period. The massive equity selloff eroded more than $9 trillion in market value in the same time frame, per Bloomberg data. The pullback was triggered by the Russia-Ukraine war, disrupted supply chain systems, sky-high inflation and rising interest rates. Stubborn inflation readings prompted the central bank to get all the more hawkish. Last month, Fed hiked interest rates by 75 bps, the highest increase since 1994. Similar hikes in the remainder of the year are not ruled out.

Fed Chairman Powell vowed last week that he would not let the economy slip into a higher interest rate regime even if that calls for hiking interest rates to a level that would put economic growth at risk. Recessionary fears are currently dominating the market mood and until inflation is tamed meaningfully, the problems are likely to persist.

In such turbulent times, value investing is the key. In value analysis, though price-to-earnings (P/E) and price-to-sales (P/S) are most preferred by investors, the underrated earnings yield ratio is also an easy-to-use valuation tool for identifying low-priced stocks with exceptional returns. Cabot Corporation CBT, Range Resources Corporation RRC, Sociedad Quimica y Minera de Chile S.A. SQM, HSBC Holdings plc HSBC and Imperial Oil Ltd. IMO are some high earnings yield value stocks.

Unlock Portfolio Value Through Earnings Yield

As the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. 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. Such stocks are poised to bounce back as and when investors recognize the inherent value of companies.

One interesting ratio that you can consider for picking attractively valued stocks is earnings yield. The ratio is the inverse of the price-to-earnings (P/E) ratio and is measured as (Annual Earnings per Share/Market Price) x 100. While comparing similar stocks, the one with higher earnings yield is more likely to provide better returns, with other factors remaining constant.

Earnings Yield, in fact, has the edge over the popular P/E ratio as the former facilitates the comparison of the performance of a market index with the 10-year Treasury yield. When the yield of the market index is more than the 10-year Treasury yield, stocks can be considered undervalued in comparison to bonds and vice versa. In such a situation, for value investors, investing in the stock market may be a better option than the bond market.

However, it is important to remember that T-bills are risk-free, while stock investments come with a caveat. It would be a good idea to add a risk premium to the Treasury yield while comparing it with the earnings yield of a stock or the overall market.

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 the 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 136 stocks that made it through the screen:

Cabot: Based in Boston, Cabot is a leading global specialty chemicals and performance materials company. The firm is committed to boosting its specialty compounds business globally. It is riding on several acquisitions, including NSCC Carbon black plant, Shenzhen Sanshun, and Tokai Carbon black plant among others. Healthy cash flows, balance sheet strength and shareholder-friendly moves are positives in Cabot’s story.

The Zacks Consensus Estimate for Cabot’s fiscal 2022 sales and earnings implies year-over-year growth of 23% and 22.5%, respectively. The consensus mark for EPS has moved north by 5 cents over the past 30 days. Over the trailing four quarters, Cabot surpassed earnings estimates on all occasions, with the average surprise being 16.17%. The stock currently sports a Zacks Rank #1.

Range Resources: Based in Texas, Range Resources is an oil and gas explorer with extensive resources in key regions like Marcellus Shale & North Louisiana. The company is set to reap benefits in the long term from its projects in the Appalachian Basin. As most of its production comprises natural gas, RRC is well-positioned to capitalize on the mounting clean energy demand.The upstream energy firm expects free cash flow to exceed $1.4 billion this year, which could be the highest among the Appalachian players.

The Zacks Consensus Estimate for RRC’s 2022 sales and earnings implies year-over-year growth of 25% and 142%, respectively. The consensus mark for EPS has moved north by 29 cents over the past 30 days. The stock currently sports a Zacks Rank #1 and has a Value Score of A.

Sociedad Quimica: Chile-based Sociedad Quimica produces plant nutrients, iodine, lithium and industrial chemicals. It benefits from being a low-cost producer of potassium chloride, potassium sulfate and potassium nitrate. Higher demand also supports sales volumes in Sociedad Quimica’s specialty plant nutrition business. Rising demand is also backing the higher prices of potassium chloride. SQM is seeing a significant rise in global potassium prices, driven by the shortage of potash and potassium-based fertilizers.

The Zacks Consensus Estimate for SQM’s 2022 sales and earnings implies year-over-year growth of 165.5% and 363%, respectively. The consensus mark for EPS has moved north by $1.52 over the past 30 days. The stock currently sports a Zacks Rank #1 and has a long-term expected EPS growth rate of 17.7%,

HSBC: London-based HSBC is a major global banking and financial services firm, with $3.02 trillion in assets as of Mar 31, 2022. A strong capital position, initiatives to strengthen digital capabilities, an extensive network and improvement in operating efficiency through business restructuring will likely keep aiding HSBC’s growth.Exit from the U.S. and French retail banking operations is expected to help the company focus on Asia. In sync with this, the acquisition of AXA Singapore insurance assets will expand the company's business in the region.

The Zacks Consensus Estimate for HSBC’s 2022 sales and earnings implies year-over-year growth of 4.3% and 2%, respectively. The consensus mark for EPS has moved north by 3 cents over the past 60 days. The stock currently carries a Zacks Rank #2 and has a long-term expected EPS growth rate of 21.2%,

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 82.2% and 177.3%, respectively. The consensus mark for EPS has moved north by 73 cents over the past 30 days.  The stock currently carries a Zacks Rank #2 and has a VGM 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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Range Resources Corporation (RRC) : Free Stock Analysis Report
 
Imperial Oil Limited (IMO) : Free Stock Analysis Report
 
Sociedad Quimica y Minera S.A. (SQM) : Free Stock Analysis Report
 
Cabot Corporation (CBT) : Free Stock Analysis Report
 
HSBC Holdings plc (HSBC) : Free Stock Analysis Report
 
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