Value investing is the best approach to ferret out great bargains. The method 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. Though price-to-earnings (P/E) and price-to-sales (P/S) valuation tools are more commonly used for stock selection, the earnings yield metric is also an interesting measure for pick undervalued stocks with solid upside potential.
One could invest in high earnings yield stocks like Apogee Enterprises APOG, Cabot Corporation CBT, STMicroelectronics N.V. STM, United Rentals, Inc. URI and ProPetro Holding Corp. PUMP to fetch handsome long-term rewards.
Unlock Portfolio Value Through Earnings Yield
Earnings yield is useful for investors concerned about the rate of return on an investment. This metric, expressed in percentage, is calculated as annual earnings per share (EPS) divided by market price per share — the inverse of the price-to-earnings (P/E) ratio.
While comparing stocks, if other factors are similar, the one with higher earnings yield is considered undervalued. That’s because this metric measures the anticipated yield (or return) from earnings for each dollar invested in a stock today.
Earnings yield is not as widely used as P/E ratio as a valuation metric but investors most commonly 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 the stock is lower than the 10-year Treasury yield, the stock would be considered overvalued relative to bonds. Conversely, if the yield on the stock is higher, it would be considered undervalued.
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 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 five of the 144 stocks that made it through the screen:
Apogee: Headquartered in Minnesota, Apogee is a leader in architectural products and services, providing architectural glass, aluminum framing systems and installation services for buildings, and value-added glass and acrylic for custom picture framing and displays.Backed by its strong project pipeline and improving order trends, Apogee expects to sustain backlog growth in fiscal 2023. Also, efforts to control costs and improve productivity and efficiency will help negate the impact of supply-chain headwinds and higher costs.
The Zacks Consensus Estimate for Apogee’s fiscal 2023 sales and earnings implies year-over-year growth of 9% and 54%, respectively. The consensus mark for EPS has moved north by 6 cents over the past 30 days. Over the trailing three quarters, APOG surpassed earnings estimates on all occasions. The stock currently sports a Zacks Rank #1 and has a Value Score of B.
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 22.5% each. The consensus mark for EPS has moved north by 5 cents over the past 60 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 and a Value Score of B.
STMicroelectronics: Geneva-based STMicroelectronics, designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications.A favorable mix and strong pricing remain positives for profitability. Given its exposure to the automotive market, the replenishment of inventories across the automotive supply chain and the ongoing electrification and digitalization boost the company’s prospects.
The Zacks Consensus Estimate for STMicroelectronics’ 2022 sales and earnings implies year-over-year growth of 26% and 80%, respectively. The consensus mark for EPS has moved north by 55 cents over the past seven days. Over the trailing four quarters, STM surpassed earnings estimates on three occasions and missed on the other, with the average surprise being 9.6%. The stock currently sports a Zacks Rank #1 and a Value Score of B.
United Rentals: Headquartered in Stamford, United Rentals is the largest equipment rental company in the world. The company offers 4,400 classes of equipment for rent on an hourly, daily, weekly or monthly basis.United Rentals is expanding geographic borders and product portfolio through acquisitions and joint ventures. During first-half 2022, United Rentals made seven bolt-on acquisitions. It enjoys strong brand recognition and has ample liquidity to meet future business needs.
The Zacks Consensus Estimate for United Rentals’ 2022 sales and earnings implies year-over-year growth of 18.5% and 40.6%, respectively. The consensus mark for EPS has moved north by $1.33 over the past seven days. Over the trailing four quarters, URI surpassed earnings estimates on three occasions and missed on the other, with the average surprise being 8%. The stock currently sports a Zacks Rank #1 and has a Value Score of A.
ProPetro: Midland, TX-based ProPetro Holding is an oilfield services provider operating primarily in the Permian Basin spread over west Texas and New Mexico. The acquisition of Pioneer Natural Resources' Permian pressure pumping assets transformed ProPetro into a Permian-focused pressure pumping powerhouse. The company is likely to benefit from the multi-year upcycle by providing hydraulic fracturing and other well completion services to the upstream firms.ProPetro's debt-free balance sheet is another positive.
The Zacks Consensus Estimate for ProPetro’s 2022 sales and earnings implies year-over-year growth of 45.4% and 281.1%, respectively. The consensus mark for EPS has moved north by 3 cents over the past 30 days. Over the trailing four quarters, PUMP surpassed earnings estimates on two occasions for as many misses. The stock currently sports a Zacks Rank #1 and has 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 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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STMicroelectronics N.V. (STM) : Free Stock Analysis Report
Apogee Enterprises, Inc. (APOG) : Free Stock Analysis Report
Cabot Corporation (CBT) : Free Stock Analysis Report
United Rentals, Inc. (URI) : Free Stock Analysis Report
ProPetro Holding Corp. (PUMP) : Free Stock Analysis Report
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