The recent consumer price index (ETF:CPI) data revealed that U.S. inflation is running hotter than anticipated. Prices rose 0.4% in March over the previous month and 3.5% year over year, surpassing forecasts of 0.3% and 3.4%, respectively. The data confirmed concerns that inflation is stickier than expected and lowered expectations for imminent interest rate cuts by the Federal Reserve.
Market predictions for rate cuts in June have shifted significantly since the CPI release. The Fed is determined not to cut rates until it has "gained greater confidence" that inflation is headed back toward 2%. In addition, geopolitical unrest and rising energy costs pose risks that could further escalate inflation.
In this uncertain landscape, value investing is one of the most prudent strategies.This 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. Value stocks, which often provide steady dividend payouts, offer a degree of safety in uncertain market environments.
Using the Earnings Yield Metric
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 (ETF: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 ...