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5 Low-Leverage Stocks to Buy on Rate Cut Expectations
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Major U.S. stock indices ended in the green on Dec 26, reflecting investors’ optimism on expectations that the Federal Reserve might cut interest rates in March 2024.
This, along with the declining inflation trend in the economy, might lead investors to make some valuable investments. However, since the share market has lately been on edge, we recommend stocks like Vicro Manufacturing (VIRC - Free Report) , Photronics (PLAB - Free Report) , ALLETE Inc (ALE - Free Report) , Teekay Tankers (TNK - Free Report) and Atmos Energy (ATO - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.
Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.
In finance, leverage is a term used to denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing. But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
However, debt financing has its share of drawbacks. Particularly, it is desirable only as long as it successfully generates a higher rate of return compared to the interest rate. So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to exorbitant debt financing.
The crux of safe investment lies in choosing a company that is not burdened with debt, as a debt-free stock is almost impossible to find.
The equity market can be volatile at times, and, as an investor, if you don’t want to lose big time, we suggest you invest in stocks which bear low leverage and are hence less risky.
To identify such stocks, 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 lower debt-to-equity ratio reflects improved solvency for a company.
With the fourth-quarter earnings season approaching, investors must be eyeing stocks that have exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio in times of economic downturn, 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.
Yet, an investment strategy based solely on the 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 or 2 have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here we present our five picks out of the 20 stocks that made it through the screen.
Vicro Manufacturing: The company is the largest manufacturer and supplier of movable furniture and equipment for the education market in the United States. On Dec 8, 2023, VIRC announced its third-quarter 2023 results. Its sales improved 8.9% year over year, while net income improved 29%.
VIRC holds a four-quarter average earnings surprise of 188.62%. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2023 sales suggests a 15.6% improvement from the 2022 reported figure.
Photronics: The company is a leading worldwide manufacturer of photomasks, which are high-precision quartz plates that contain microscopic images of electronic circuits. On Dec 13, 2023, Photronics reported its fiscal fourth-quarter 2023 results. Its revenues improved 8% year over year, while adjusted earnings per share rose 22.9%.
PLAB currently carries a Zacks Rank #1. The company holds a four-quarter average earnings surprise of 8.51%. The Zacks Consensus Estimate for fiscal 2024 earnings suggests a 27.5% improvement year over year.
ALLETE: It is an energy company. On Dec 21, 2023, ALLETE signed development agreements with North Plains Connector LLC, a subsidiary of Grid United LLC, for the North Plains Connector project, a new, approximately 400-mile high-voltage direct-current transmission line from central North Dakota to Colstrip, MT.
ALE currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.10%. The Zacks Consensus Estimate for ALE’s 2023 sales indicates an improvement of 22.3% from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teekay Tankers: It is the largest operator of mid-sized tankers, including suezmax, aframax, and long-range two vessels. On Nov 2, 2023, Teekay Tankers announced its third-quarter 2023 results. Its revenues improved 2.3% year over year to $285.9 million.
TNK currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s sales suggests a 61.3% improvement from the 2022 reported figure.
Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On Nov 8, 2023, the company reported its fourth-quarter fiscal 2023 results. Its pipeline and storage operating income increased a solid 45.9% on a year-over-year basis.
ATO currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7.3%. The Zacks Consensus Estimate for ATO’s fiscal 2024 sales suggests a 23.4% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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: Shutterstock
5 Low-Leverage Stocks to Buy on Rate Cut Expectations
Major U.S. stock indices ended in the green on Dec 26, reflecting investors’ optimism on expectations that the Federal Reserve might cut interest rates in March 2024.
This, along with the declining inflation trend in the economy, might lead investors to make some valuable investments. However, since the share market has lately been on edge, we recommend stocks like Vicro Manufacturing (VIRC - Free Report) , Photronics (PLAB - Free Report) , ALLETE Inc (ALE - Free Report) , Teekay Tankers (TNK - Free Report) and Atmos Energy (ATO - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.
Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.
In finance, leverage is a term used to denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing. But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
However, debt financing has its share of drawbacks. Particularly, it is desirable only as long as it successfully generates a higher rate of return compared to the interest rate. So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to exorbitant debt financing.
The crux of safe investment lies in choosing a company that is not burdened with debt, as a debt-free stock is almost impossible to find.
The equity market can be volatile at times, and, as an investor, if you don’t want to lose big time, we suggest you invest in stocks which bear low leverage and are hence less risky.
To identify such stocks, 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 lower debt-to-equity ratio reflects improved solvency for a company.
With the fourth-quarter earnings season approaching, investors must be eyeing stocks that have exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio in times of economic downturn, 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.
Yet, an investment strategy based solely on the 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 or 2 have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here we present our five picks out of the 20 stocks that made it through the screen.
Vicro Manufacturing: The company is the largest manufacturer and supplier of movable furniture and equipment for the education market in the United States. On Dec 8, 2023, VIRC announced its third-quarter 2023 results. Its sales improved 8.9% year over year, while net income improved 29%.
VIRC holds a four-quarter average earnings surprise of 188.62%. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2023 sales suggests a 15.6% improvement from the 2022 reported figure.
Photronics: The company is a leading worldwide manufacturer of photomasks, which are high-precision quartz plates that contain microscopic images of electronic circuits. On Dec 13, 2023, Photronics reported its fiscal fourth-quarter 2023 results. Its revenues improved 8% year over year, while adjusted earnings per share rose 22.9%.
PLAB currently carries a Zacks Rank #1. The company holds a four-quarter average earnings surprise of 8.51%. The Zacks Consensus Estimate for fiscal 2024 earnings suggests a 27.5% improvement year over year.
ALLETE: It is an energy company. On Dec 21, 2023, ALLETE signed development agreements with North Plains Connector LLC, a subsidiary of Grid United LLC, for the North Plains Connector project, a new, approximately 400-mile high-voltage direct-current transmission line from central North Dakota to Colstrip, MT.
ALE currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.10%. The Zacks Consensus Estimate for ALE’s 2023 sales indicates an improvement of 22.3% from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teekay Tankers: It is the largest operator of mid-sized tankers, including suezmax, aframax, and long-range two vessels. On Nov 2, 2023, Teekay Tankers announced its third-quarter 2023 results. Its revenues improved 2.3% year over year to $285.9 million.
TNK currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s sales suggests a 61.3% improvement from the 2022 reported figure.
Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On Nov 8, 2023, the company reported its fourth-quarter fiscal 2023 results. Its pipeline and storage operating income increased a solid 45.9% on a year-over-year basis.
ATO currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7.3%. The Zacks Consensus Estimate for ATO’s fiscal 2024 sales suggests a 23.4% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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.