The U.S. annual inflation rate slowed for the sixth consecutive month to 2.4% in September 2024, marking its lowest level since February 2021. Additionally, stagnant wholesale prices, as indicated by the latest Producer Price Index, signal continued progress on inflation. Despite political and geopolitical uncertainty, the S&P 500 has surged 22% this year and is poised for another year of double-digit gains. However, a tight U.S. presidential race and heightened Middle East tensions have investors cautious about potential market volatility. In this environment, value investing could offer a prudent strategy.
Barrick Gold Corporation GOLD, Catalyst Pharmaceuticals, Inc. CPRX, Allegiant Travel Company ALGT and America Movil, S.A.B. de C.V. AMX are a few solid high earnings yield picks for value investors.
Play Value Investing Using Earnings Yield Metric
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.
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. You can see the complete list of today’s Zacks #1 Rank stocks here.
Our Picks
Here we discuss four of the 19 stocks that qualified the screening:
Barrick Gold is one of the largest gold mining companies in the world. It is well-placed to benefit from the progress in key growth projects that should significantly contribute to its production. The company’s strong liquidity position and investor-friendly moves amid solid cash flows are encouraging. The Zacks Consensus Estimate for GOLD’s 2024 and 2025 earnings per share implies year-over-year growth of 52% and 38%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 5 cents and 16 cents, respectively, over the past 30 days. Barrick Gold currently carries a Zacks Rank #2 and has a Value Score of A.
Catalyst Pharma, a commercial-stage biopharmaceutical company, is dedicated to developing and commercializing therapies for rare and challenging diseases. The launch of Firdapse has seen promising uptake. Additionally, Catalyst Pharma's strategic acquisition of selective rights to Fycompa CIII and Agamree marks a positive expansion of its portfolio beyond Firdapse. The Zacks Consensus Estimate for CPRX’s 2024 and 2025 sales implies year-over-year growth of 18.7% and 18.1%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 3 cents and 1 cent, respectively, over the past 60 days. Catalyst Pharma currently carries a Zacks Rank #2 and has a Value Score of B.
Allegiant, a low-cost airline, also offers vacation packages, including car rentals and hotel bookings. Fleet modernization and improved third-quarter 2024 guidance, driven by strong travel demand, boost optimism. The company now expects third-quarter capacity to rise 1.6% year over year, up from its previous forecast of 1.3%. The Zacks Consensus Estimate for ALGT’s 2025 sales and earnings implies year-over-year growth of 12% and 304%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 51 cents and 35 cents, respectively, over the past 30 days. Allegiant currently carries a Zacks Rank #2 and has a Value Score of A.
America Movil is the leading provider of integrated telecommunications services in Latin America. The company is benefiting from a growing subscriber base, with 2.4 million wireless additions in second-quarter 2024, including 1.8 million postpaid. Strong growth in Brazil, Mexico, and Colombia boosts performance. Expanding 5G networks and strategic investments enhance its platform and support long-term growth. The Zacks Consensus Estimate for AMX’s 2024 and 2025 earnings implies year-over-year growth of 1.5% and 33.2%, respectively. Estimates for 2024 and 2025 earnings per share have moved up by 2 cents and 5 cents, respectively, over the past 60 days. America Movil currently carries a Zacks Rank #2 and has a Value 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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