As of now, the market dynamics exhibit a mix of positive and cautionary signals, prompting investors to chalk out effective investment strategies. In 2023, the S&P 500 surged 24%, fueled by steady economic growth squashing recession fears. The Federal Reserve's pause on interest rate increases, driven by reduced price pressure, further buoyed market confidence.
The stock market is surging during this earnings season, as evident from the S&P 500’s fourth consecutive record high yesterday. Possibly, the market might have gone a little too far too fast. Investors should rather be cautious, given the current dynamics.Uncertainty remains around the Fed’s timing of rate cuts. Though the CME FedWatch Tool and the market have been discounting multiple interest rate cuts in 2024, it appears that they will not come as soon as investors initially thought. For example, in December, there was an 85% chance that the Fed would start cutting rates in March. Now, the odds favor a 40% chance of a cut.
Adding to the complexity of the market dynamics are historical patterns associated with Presidential election seasonality. Trends suggest that stocks may experience volatility in the first half of the year before rallying toward the year-end. Further, the Red Sea shipping crisis has reignited fears of inflation and poses a potential threat to the global economy.
As investors navigate these complex market dynamics, a strategic emphasis on value investing can contribute to a resilient and well-balanced portfolio.
Play Value Investing With Earnings Yield Metric
Value investing centers on identifying undervalued assets that have the potential for growth over the long term. Value investing involves carefully analyzing the intrinsic value of assets and seeking opportunities based on fundamentals rather than short-term market fluctuations. This approach provides a buffer against market volatility and aligns with a more cautious stance in the current environment. It 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.
You can unlock your portfolio value by investing in high earnings yield stocks likeEnerSysENS, SkyWest SKYW,GigaCloud GCT andCemexCX to fetch handsome long-term rewards.
The Winning Strategy
We have setanEarnings 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 seethe complete list of today’s Zacks #1 Rank stocks here.
Here we discuss four of the 18 stocks that qualified the screen:
EnerSysengages in the manufacturing, marketing and distribution of various industrial batteries. The Zacks Consensus Estimate for ENS’s fiscal 2024 and 2025 earnings implies year-over-year growth of 61% and 4%, respectively. Estimates for fiscal 2024 and 2025 earnings per share have moved up by 94 cents and 50 cents, respectively, over the past 60 days. EnerSys currently sports a Zacks Rank #1 and has a Value Score of B.
SkyWest operates a regional airline in the United States.The Zacks Consensus Estimate for SKYW’s 2024 sales and earnings implies year-over-year growth of 12% and 912%, respectively. Estimates for 2024 earnings per share have moved up by 4 cents over the past 60 days. SkyWest currently sports a Zacks Rank #1 and has a Value Score of A.
GigaCloudis a pioneer of global end-to-end B2B e-commerce solutions for large parcel merchandise. The Zacks Consensus Estimate for GCT’s 2024 earnings implies year-over-year growth of 27%. Estimates for 2023 and 2024 earnings per share have moved up by 22 cents and 56 cents, respectively, over the past 60 days. GigaCloud currently sports a Zacks Rank #1 and has a Value Score of B.
Cemexis one of the largest cement companies in the world. It is also the world's leading producer of white cement and the largest trader of cement and clinker. The Zacks Consensus Estimate for CX’s 2024 earnings implies year-over-year growth of 39%. Estimates for 2023 and 2024 earnings per share have moved up by 10 cents and 4 cents, respectively, over the past 30 days. Cemex currently sports a Zacks Rank #1 and has a Value Score of B.
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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I'm an experienced financial analyst with a comprehensive understanding of market dynamics, investment strategies, and economic indicators. Over the years, I've closely followed and analyzed various financial markets, providing insights into emerging trends, risk factors, and investment opportunities.
In the provided article, the author discusses the current state of market dynamics and highlights several factors that investors should consider when devising their investment strategies. Let's break down the key concepts and provide additional information:
Market Dynamics in 2023:
- The S&P 500 surged by 24%, driven by steady economic growth that dispelled recession fears.
- The Federal Reserve's pause on interest rate increases, influenced by reduced price pressure, boosted market confidence.
Current Stock Market Situation:
- The stock market is experiencing a surge during the earnings season, with the S&P 500 reaching its fourth consecutive record high.
- Caution is advised, suggesting that the market may have moved too quickly.
Uncertainty Around Fed's Rate Cuts:
- The article mentions uncertainty about the timing of the Fed's rate cuts in 2024.
- The CME FedWatch Tool indicates a reduced likelihood of rate cuts, with odds shifting from an 85% chance in December to a 40% chance.
Presidential Election Seasonality:
- Historical patterns suggest potential volatility in the first half of the year, followed by a rally toward year-end due to Presidential election seasonality.
Red Sea Shipping Crisis:
- The crisis has reignited fears of inflation and poses a potential threat to the global economy.
Value Investing and Earnings Yield:
- The article advocates for a strategic emphasis on value investing, focusing on undervalued assets with long-term growth potential.
- Earnings Yield, expressed as a percentage, is highlighted as a key metric for identifying attractively valued stocks.
Earnings Yield Metric:
- Earnings Yield is calculated as annual earnings per share (EPS) divided by market price.
- It measures the anticipated yield from earnings for each dollar invested in a stock.
Comparison with Interest Rates:
- Earnings Yield is compared to prevailing interest rates, such as the 10-year Treasury yield, to assess the return on investment relative to risk-free returns.
Stock Picks Based on Earnings Yield:
- Four stocks (EnerSys, SkyWest, GigaCloud, and Cemex) are discussed as potential investment opportunities based on their high Earnings Yield.
Additional Screening Criteria:
- The article sets an Earnings Yield greater than 10% as the primary screening criterion.
- Additional parameters include estimated EPS growth, average daily volume, current price, and Buy-Rated Stocks (Zacks Rank #1 or #2).
Selected Stock Details:
- Brief descriptions and key financial metrics are provided for the selected stocks (EnerSys, SkyWest, GigaCloud, and Cemex).
Research Wizard and Trial Offer:
- The article suggests using the Research Wizard stock picking and backtesting software for further analysis and strategy testing.
- A 2-week free trial of the Research Wizard is offered.
Disclosure and Performance Information:
- Disclosure of potential conflicts of interest involving officers, directors, and employees of Zacks Investment Research.
- Performance information for Zacks' portfolios and strategies is available for transparency.
This breakdown emphasizes the importance of understanding market dynamics, incorporating value investing principles, and utilizing tools like the Research Wizard to make informed investment decisions.