5 High Earnings Yield Value Picks Amid Market Jitters

Since the onset of 2022, Wall Street has been reeling under immense volatility. Year to date, S&P 500, Nasdaq and Dow have plunged around 15.6%, 24.5% and 11.4%, respectively. A 40-year high inflation, the Russia-Ukraine war, a devastated supply chain scenario, lockdown restrictions in China, Omicron flare-ups and rising interest rates are weighing on the global economy currently.

Earlier this month, the Fed raised interest rates by 50 bps as expected, pushing the benchmark above 0.75%. The hike marked the biggest interest-rate increase since 2000. But would Fed’s interventions be enough to tame the rising inflationary pressures? Investors are skeptical if the Fed could rescue them from the downdraft in equity. In fact, Fed Chair Jerome Powell recently stated, “Whether we can execute a soft landing or not, it may actually depend on factors that we don’t control.” In such turbulent times, the best-case scenario seems to be a slowdown and the worst-case scenario could be a recession. Notably, a large section of economists and financial experts have already warned of an imminent recession either in 2022 or 2023.

Time to Focus on Value Investing

In times of such uncertainty, it's difficult for investors to maintain cool and they might be tempted to resort to panic selling. In contrast, it might be an opportune time for investors who are flush with cash to get off the sidelines and invest in fundamentally strong companies amid the sell-off. For those still unsure whether this is the right time to invest, you can hit the buy button now if you're planning to invest for the long term.

In such times, value investing should be one of the most effective investment approaches. It takes a long-term view and seeks to gauge the intrinsic value of the companies based on their fundamental strength, earnings potential and financials. 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 its intrinsic value to reflect 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. One could invest in high earnings yield stocks like Imperial Oil Limited IMO, CF Industry Holdings CF, The Chemours Company CC, Medifast, Inc. MED and APA Corporation APA to fetch handsome long-term rewards.

Earnings Yield: Inverse of P/E Ratio

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 italso 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.

Screening Parameters

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 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 Choices

Below we have highlighted five of the 136 stocks that made it through the screen:

Imperial Oil: Calgary-based Imperial Oil Limited is one of the largest integrated oil companies of Canada, mainly engaged in the oil and gas production, petroleum products refining and marketing and chemical business.IMO is Canada’s largest jet fuel supplier and a major producer of asphalt.

The Zacks Consensus Estimate for IMO’s 2022 sales and earnings implies year-over-year growth of 60% and 145%, respectively. The consensus mark for EPS has moved north by 22.2% over the past 30 days.  The stock currently sports a Zacks Rank #1 and has a VGM Score of A.

CF Industries: Headquartered in Deerfield, CF Industries is one of the largest manufacturers and distributors of nitrogenous fertilizer and other nitrogen products globally. In fact, it is the leading nitrogen fertilizer producer in North America, operating two of the largest fertilizer complexes in the continent, one in Louisiana, and the other in Alberta.

The Zacks Consensus Estimate for CF Industries’ 2022 sales and earnings implies year-over-year growth of 76% and 322%, respectively. The consensus mark for EPS has moved north by 11.5% over the past seven days.  The stock currently sports a Zacks Rank #1 and has a VGM Score of A.

Chemours: Wilmington-based Chemours is a leading provider of performance chemicals that are key ingredients in end-products and processes across a host of industries including plastics and coatings, refrigeration and air conditioning, mining and general industrial manufacturing and electronics. CC’s major products include titanium dioxide, refrigerants, industrial fluoropolymer resins and sodium cyanide.

The Zacks Consensus Estimate for Chemours’ 2022 sales and earnings implies year-over-year growth of 13% and 31%, respectively. The consensus mark for EPS has moved north by 5.2% over the past seven days.  The stock currently carries a Zacks Rank #2 and has a VGM Score of A.

Medifast: Baltimore-based Medifast is a leading manufacturer and distributor of clinically-proven healthy living products and programs. With more than 40 years of experience in the health and wellness space, MED has become a remarkable direct-selling company in the industry. Given the evolving consumer interests in health and wellness, Medifast is banking on its OPTAVIA lifestyle solution and coaching support system.

The Zacks Consensus Estimate for MED’s 2022 sales and earnings implies year-over-year growth of 19% and 12%, respectively. The consensus mark for EPS has moved north by 8 cents over the past 30 days.  The stock currently carries a Zacks Rank #2 and has a VGM Score of A.

APA: Texas-based APA is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. Geographically, the company’s operations are in the United States, Egypt and in the North Sea of the United Kingdom. APA also holds acreage in offshore Suriname (South America) and other international locations.

The Zacks Consensus Estimate for APA’s 2022 sales and earnings implies year-over-year growth of 41% and 165%, respectively. The consensus mark for EPS has moved north by 27.2% over the past 30 days.  The stock currently carries a Zacks Rank #2 and has a VGM Score of A.

You can get the rest of the stocks on this list by signing up now for a 2-week free trial to 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.

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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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APA Corporation (APA) : Free Stock Analysis Report
 
CF Industries Holdings, Inc. (CF) : Free Stock Analysis Report
 
Imperial Oil Limited (IMO) : Free Stock Analysis Report
 
MEDIFAST INC (MED) : Free Stock Analysis Report
 
The Chemours Company (CC) : Free Stock Analysis Report
 
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