Barring a short-lived summer rally from mid-June to mid-August, the US stock market has struggled for most of 2022. A challenging macro environment has sent stocks tumbling in 2022. Ukraine war and sky high inflation. While the Fed has adopted an aggressive monetary policy stance to tame stubborn inflation, efforts have not yet produced the desired results. Inflation remains historically high, even after the Fed’s radical change.
All eyes are on the Fed’s official announcement on interest rates today. Fed Chair Jerome Powell made it very clear in his message to the Jackson Hole conference that rate hikes will continue until inflation returns to the target rate of 2%. Wall Street is confident of raising interest rates by at least 0.75% for the third consecutive day when its two-day FOMC meeting ends today.
We have indeed ended up in an extremely challenging macroeconomic environment after surviving a one-off pandemic. With inflation at historically high levels and the Fed set to raise lending rates further, a recession is looming. Amid all the turmoil and economic uncertainty, markets are likely to remain unsettled. In such turbulent times, investors should be on the lookout for fundamentally strong value stocks. James River Group Holdings, Ltd (JRVR – free report) HSBC Holdings plc (HSBC – free report) Reinsurance Group of America (RGA – Free report) and amalgamated finance company (amal – Free Report) are a few high-yield-yield-value picks that can yield handsome rewards.
Value investing is key now
The market is currently at a critical juncture and there are numerous challenges in the macro environment. With a number of deterrents making the rounds in the market, it’s wise to look for quality when picking stocks. To this end, value investing can be one of the most effective approaches. The value investing approach seeks to profit from investing in quality stocks that appear to be trading at a discount to their intrinsic value, and ultimately to generate attractive returns as the stock price rises towards its intrinsic value in order to achieve actual to reflect fundamentals. The value investment strategy is certainly best suited for long-term investors.
When looking at valuation metrics, the first thing that comes to mind is the price-to-earnings (P/E) ratio because it’s inherently simple. But one can also consider another interesting ratio for picking attractively valued stocks. This is the return on investment. This percentage metric is calculated as annual earnings per share (EPS) divided by the market price. It measures the expected return (or yield) on earnings for every dollar invested in a stock today.
Earnings yield has an advantage over P/E
If other factors are similar when comparing stocks, the one with the higher earnings yield will be considered undervalued, while the one with the lower earnings yield will be considered overpriced.
While earnings yield is simply the inverse of P/E, it’s a bit more revealing than the latter. It makes it easier to compare stocks to fixed income. Investors often compare a stock’s earnings yield to prevailing interest rates, such as B. the current 10-year Treasury yield to get a feel for the yield it offers compared to virtually risk-free yields.
If a stock’s yield is less than the 10-year Treasury yield, it would be considered overvalued relative to bonds. On the other hand, if the stock’s yield is higher, it is considered undervalued. In this situation, investing in the stock market would be a better option for a value investor.
The winning strategy
We have hired Earnings yield greater than 10% as our primary screening criterion, but it alone cannot be used to select stocks that have the potential to produce solid returns. Therefore, we 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 estimate of expected earnings per share to actual earnings per 12 months.
Average daily volume (20 days) greater than or equal to 100,000: A high trading volume implies that a stock has sufficient liquidity.
Current price greater than or equal to $5.
Shares with a buy recommendation: Stocks with a Zacks rank of #1 (Strong Buy) or #2 (Buy) are known for outperforming their peers in any market environment. You can see the full list of today’s Zacks #1 Rank stocks can be found here.
Here are four of the 121 stocks that qualified for the screen:
James river: James River, based in Bermuda, is an insurance company that owns and operates specialty insurance and reinsurance businesses. The Company operates through Excess and Surplus Lines, Specialty Admitted Insurance and Casualty Reinsurance segments.
Zacks consensus estimates for JRVR’s earnings and sales in 2022 point to growth of 137% and 3% year over year, respectively. The consensus level for James River’s 2022 EPS has moved north by 5 cents over the past 60 days. The stock currently has a Zacks rank of #1 and a Value Score of B.
HSBC: HSBC is headquartered in London and offers a wide range of financial services to nearly 64 countries and regions in Europe, Asia, the Middle East and North Africa, and North and Latin America. As of June 30, 2022, it had assets of $2.99 trillion.
The Zacks Consensus estimate for HSBC’s earnings and sales in 2022 points to year-over-year growth of 13.2% and 5.4%, respectively. The consensus level for HSBC’s 2022 EPS has moved north by 31 cents over the past 60 days. The stock currently has a Zacks rank of #1 and a Value Score of B.
reinsurance group: Reinsurance Group, headquartered in Timberlake, is a leading global provider of traditional life and health reinsurance and financial solutions with offices in the United States, Canada, Europe and many other countries.
Zacks consensus estimate for 2022 RGA earnings and sales points to growth of 1,057.5% and 2.5% year over year, respectively. The consensus level for Reinsurance Group’s 2022 EPS has moved up $1.04 over the past 30 days. The stock currently has a Zacks rank of #1 and a Value Score of B.
Pooled Finances: Amalgamated Financial, headquartered in New York, is the bank holding company of Amalgamated Bank, a full-service commercial bank and chartered trust company. AMAL provides commercial banking and trust services nationwide, offering products and services to both corporate and retail customers.
Zacks consensus estimates for AMAL’s 2022 earnings and sales point to year-over-year growth of 42.4% and 24.1%, respectively. AMAL beat estimates by an average of 22.6% over the past four quarters. The stock currently has a Zacks rank of #2 and 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 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 mentioned in this material.
Disclosure: Performance information on Zacks portfolios and strategies is available at: https://www.zacks.com/performance.