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Want to Play Safe? Buy these 5 Low Leverage Stocks
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Leverage, in particular financial leverage, better known as debt financing, has been a significant component of operations from the very advent of corporate finance. After all, depending solely on retained earnings for business growth is next to impossible. Yet the word “debt” is unnerving for many.
This is because while debt brings with it the capacity to spend a little bit more, it also carries the burden of repayment with additional interest in the future. The problem arises when the amount of debt a company bears becomes exorbitant. As a result, companies with large debt loads are more vulnerable during economic downturns and can even go bankrupt in the worst case scenario.
Yet, in matured economies, the debt market is larger than the equity market in terms of market capitalization. In fact, America, the richest economy in the world, is the biggest borrower too.
However, this should not disappoint investors putting their money into U.S. stocks, as debt has been a part of the U.S. economy since its foundation and yet the country stands atop others. What investors need is to choose stocks with caution, avoiding highly leveraged corporations.
Naturally, the amount of debt a company currently bears has become a crucial part of equity investment decision. And here comes the importance of leverage ratios, which have been constructed historically to safeguard investors from becoming victims of debt trap.
Debt-to-equity ratio is one such measure, perhaps the most popular one, which is widely used to evaluate a company’s credit worthiness, for potential equity investments.
What’s Debt-to-Equity?
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that reflects how much debt a company currently bears. A lower debt-to-equity ratio implies a comparatively less risky business and thereby instills investors’ confidence in a company’s financial stability.
As we enter the second half of the Q3 reporting cycle, the growth picture seems to be improving compared to what we saw in the trailing quarters. Naturally, this would entice investors to pour money in stocks exhibiting solid earnings growth.
But in the uncertain world of investment, markets can trip anytime, particularly affecting companies with a higher degree of financial leverage. Therefore, blindly investing in stocks displaying solid earnings growth without considering their debt level might not be a wise move.
Choosing a Winning Strategy
Considering the aforementioned discussion, it is imperative for an investor to choose stocks that have a low debt-to-equity ratio. However, choosing stocks based solely on one financial metric might not fetch the desired outcome.
To ensure the maximum possible return from this strategy, we have expanded our screening procedure to include some other criteria.
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.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.
VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the final 21 stocks that made it through the screen.
Comfort Systems USA Inc. (FIX - Free Report) : This company offers mechanical installation, renovation, maintenance, repair, and replacement services for the mechanical services industry in the U.S. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 15.83% in the trailing four quarters.
CONE Midstream Partners LP : This is a growth-oriented master limited partnership (MLP) that owns, operates, and develops natural gas gathering and other midstream energy assets. The company currently carries a Zacks Rank #1 and witnessed a positive earnings surprise of 19.38% on an average in the trailing four quarters.
Equifax Inc. (EFX - Free Report) : This global leader in information management services witnessed a positive earnings surprise of 0.17% on an average in the trailing four quarters.It carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Preferred Apartment Communities, Inc. : This corporation primarily acquires and operates multifamily properties in select targeted markets throughout the U.S. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 2.54% on an average in the trailing four quarters.
Gentex Corp. (GNTX - Free Report) : This manufacturer of automatic-dimming rearview mirrors and electronics carries a Zacks Rank #2 and witnessed a positive earnings surprise of 5.31% on an average in the trailing four quarters.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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Want to Play Safe? Buy these 5 Low Leverage Stocks
Leverage, in particular financial leverage, better known as debt financing, has been a significant component of operations from the very advent of corporate finance. After all, depending solely on retained earnings for business growth is next to impossible. Yet the word “debt” is unnerving for many.
This is because while debt brings with it the capacity to spend a little bit more, it also carries the burden of repayment with additional interest in the future. The problem arises when the amount of debt a company bears becomes exorbitant. As a result, companies with large debt loads are more vulnerable during economic downturns and can even go bankrupt in the worst case scenario.
Yet, in matured economies, the debt market is larger than the equity market in terms of market capitalization. In fact, America, the richest economy in the world, is the biggest borrower too.
However, this should not disappoint investors putting their money into U.S. stocks, as debt has been a part of the U.S. economy since its foundation and yet the country stands atop others. What investors need is to choose stocks with caution, avoiding highly leveraged corporations.
Naturally, the amount of debt a company currently bears has become a crucial part of equity investment decision. And here comes the importance of leverage ratios, which have been constructed historically to safeguard investors from becoming victims of debt trap.
Debt-to-equity ratio is one such measure, perhaps the most popular one, which is widely used to evaluate a company’s credit worthiness, for potential equity investments.
What’s Debt-to-Equity?
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that reflects how much debt a company currently bears. A lower debt-to-equity ratio implies a comparatively less risky business and thereby instills investors’ confidence in a company’s financial stability.
As we enter the second half of the Q3 reporting cycle, the growth picture seems to be improving compared to what we saw in the trailing quarters. Naturally, this would entice investors to pour money in stocks exhibiting solid earnings growth.
But in the uncertain world of investment, markets can trip anytime, particularly affecting companies with a higher degree of financial leverage. Therefore, blindly investing in stocks displaying solid earnings growth without considering their debt level might not be a wise move.
Choosing a Winning Strategy
Considering the aforementioned discussion, it is imperative for an investor to choose stocks that have a low debt-to-equity ratio. However, choosing stocks based solely on one financial metric might not fetch the desired outcome.
To ensure the maximum possible return from this strategy, we have expanded our screening procedure to include some other criteria.
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.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.
VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the final 21 stocks that made it through the screen.
Comfort Systems USA Inc. (FIX - Free Report) : This company offers mechanical installation, renovation, maintenance, repair, and replacement services for the mechanical services industry in the U.S. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 15.83% in the trailing four quarters.
CONE Midstream Partners LP : This is a growth-oriented master limited partnership (MLP) that owns, operates, and develops natural gas gathering and other midstream energy assets. The company currently carries a Zacks Rank #1 and witnessed a positive earnings surprise of 19.38% on an average in the trailing four quarters.
Equifax Inc. (EFX - Free Report) : This global leader in information management services witnessed a positive earnings surprise of 0.17% on an average in the trailing four quarters.It carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Preferred Apartment Communities, Inc. : This corporation primarily acquires and operates multifamily properties in select targeted markets throughout the U.S. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 2.54% on an average in the trailing four quarters.
Gentex Corp. (GNTX - Free Report) : This manufacturer of automatic-dimming rearview mirrors and electronics carries a Zacks Rank #2 and witnessed a positive earnings surprise of 5.31% on an average in the trailing four quarters.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »