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Buy These 5 Low Leverage Stocks to Weather Coronavirus Impact
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The global stock market is still not stable enough to let investors heave a sigh of relief. Evidently, Wall Street took a dip recently after the Federal Reserve raised concerns that U.S. economic recovery from the devastating effects of the pandemic is facing a highly uncertain path.
Amid such a crisis, it has become even more imperative for investors to choose stocks prudently so that they don’t lose a significant amount of money. This is why investors need to be acquainted with leverage.
Notably, leverage, otherwise termed as debt financing, is the use of exogenous funds by corporations to run their operations smoothly and expand the same. Although there is option for equity financing, historically, debt financing has been preferred over equity because of its easy and cheap availability.
However, one should keep in mind that debt financing remains a feasible option as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even lead to a corporation’s bankruptcy in a worst case scenario.
Therefore, one can safely invest in a stock as long as it bears a low level of debt.
Historically several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
Analyzing Debt/Equity
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A company with a lower debt-to-equity ratio shows improved solvency for a company.
With the Q2 reporting cycle drawing to a close, investors must be eyeing stocks that exhibited solid earnings growth in the prior quarters. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.
The Winning Strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
However, an investment strategy based solely on debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening criteria to include some other factors.
Here are the other parameters:
Debt/Equity less than X-Industry Median: Stocks that are less leveraged than their industry peers.
Current Price greater than or equal to 10: The stocks must be trading at a minimum of $10 or above.
Average 20-day Volume greater than or equal to 50000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth adds to optimism, leading to a stock’s price appreciation.
VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation
Zacks Rank #1 or 2: Irrespective of market conditions, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 32 stocks that made it through the screen.
Kinsale Capital Group (KNSL - Free Report) : It offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The company delivered an earnings surprise of 7.99%, on average, in the trailing four quarters and currently sports a Zacks Rank #1.
American States Water Company (AWR - Free Report) : It along with its subsidiaries provides fresh water, wastewater services and electricity to its customers in the United States.The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 0.15% in the trailing four quarters, on average.
The Descartes Systems Group (DSGX - Free Report) : It is a provider of software-as-a-service logistics solutions. The company came up with a four-quarter earnings surprise of 6.94%, on average, and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Gaia, Inc. (GAIA - Free Report) : It provides digital video subscription service. Currently, the company carries a Zacks Rank #2 and came up with a four-quarter earnings surprise of 7.61%, on average.
West Pharmaceutical Services (WST - Free Report) : It operates as a global drug delivery technology company. It currently holds a Zacks Rank #2 and delivered a four-quarter earnings surprise of 21.42%, on average.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.
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.
Image: Bigstock
Buy These 5 Low Leverage Stocks to Weather Coronavirus Impact
The global stock market is still not stable enough to let investors heave a sigh of relief. Evidently, Wall Street took a dip recently after the Federal Reserve raised concerns that U.S. economic recovery from the devastating effects of the pandemic is facing a highly uncertain path.
Amid such a crisis, it has become even more imperative for investors to choose stocks prudently so that they don’t lose a significant amount of money. This is why investors need to be acquainted with leverage.
Notably, leverage, otherwise termed as debt financing, is the use of exogenous funds by corporations to run their operations smoothly and expand the same. Although there is option for equity financing, historically, debt financing has been preferred over equity because of its easy and cheap availability.
However, one should keep in mind that debt financing remains a feasible option as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even lead to a corporation’s bankruptcy in a worst case scenario.
Therefore, one can safely invest in a stock as long as it bears a low level of debt.
Historically several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
Analyzing Debt/Equity
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A company with a lower debt-to-equity ratio shows improved solvency for a company.
With the Q2 reporting cycle drawing to a close, investors must be eyeing stocks that exhibited solid earnings growth in the prior quarters. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.
The Winning Strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
However, an investment strategy based solely on debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening criteria to include some other factors.
Here are the other parameters:
Debt/Equity less than X-Industry Median: Stocks that are less leveraged than their industry peers.
Current Price greater than or equal to 10: The stocks must be trading at a minimum of $10 or above.
Average 20-day Volume greater than or equal to 50000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth adds to optimism, leading to a stock’s price appreciation.
VGM Score of A or B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation
Zacks Rank #1 or 2: Irrespective of market conditions, stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 32 stocks that made it through the screen.
Kinsale Capital Group (KNSL - Free Report) : It offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The company delivered an earnings surprise of 7.99%, on average, in the trailing four quarters and currently sports a Zacks Rank #1.
American States Water Company (AWR - Free Report) : It along with its subsidiaries provides fresh water, wastewater services and electricity to its customers in the United States.The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 0.15% in the trailing four quarters, on average.
The Descartes Systems Group (DSGX - Free Report) : It is a provider of software-as-a-service logistics solutions. The company came up with a four-quarter earnings surprise of 6.94%, on average, and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Gaia, Inc. (GAIA - Free Report) : It provides digital video subscription service. Currently, the company carries a Zacks Rank #2 and came up with a four-quarter earnings surprise of 7.61%, on average.
West Pharmaceutical Services (WST - Free Report) : It operates as a global drug delivery technology company. It currently holds a Zacks Rank #2 and delivered a four-quarter earnings surprise of 21.42%, on average.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
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.
Click here to sign up for a free trial to the Research Wizard today.
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.