The hike in Fed interest rate last week caught U.S. investors off guard as it brought with an unforeseen projection of three more hikes next year. Of course, a rate hike indicates a stable economy but continued appreciation in the same can result in decelerating corporate profits and eventually a downtrend in economic growth.
Since most industries in the U.S. are highly capital intensive, debt financing has always been an inherent strategy adopted by large corporations in the country to boost their operations. However, debt carries with it the burden of interest payment. Yet, debt financing is more popular than equity financing, probably because of its easy and cheap availability.
Nevertheless, the Fed’s aggressive stance on rate hike has made debt all the more dearer. U.S. companies will now have to bear a much higher cost of capital, which they would most probably try to recover by raising the cost of their products. As a result inflation will shoot up, which despite being an underlying sign of economic strength, will hamper the nation’s export business.
Eventually, exorbitant cost of capital might dissuade corporations from taking debt necessary to boost their production and in turn affect their profit margin. Considering the prevailing rate hike scenario and the fact that the U.S. budget deficit is expected to increaseall the more in the coming years, investors might be reluctant to pick any U.S. stock altogether.
However, this should not discourage investors since the U.S. economy has been debt dependent since its foundation andis still the largest in the world. What they need to do however is choose wisely from those companies that have a lesser debt burden.
This is where the significance of financial leverage ratio comes into play as it measures the extent of financial leverage a company bears. Several leverage ratios have been developed for this purpose, with debt-to-equity ratio being the most popular.
Analyzing Debt-to-Equity Ratio
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.
With the Q3 reporting cycle over for this year, it is quite evident that the growth picture improved from what we saw in the trailing two quarters. Naturally, investors will now target stocks exhibiting solid earnings growth.
But choosing stocks that boast earnings growth only might not be a wise investment strategy. A higher degree of leverage can turn an attractive investment option into a nightmare in times of financial crisis.
The Winning Strategy
It goes without saying that given the current volatile market condition, which is making investors more skeptical by the day, choosing low leverage stocks will be a wise strategy.
However, 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.
Here is the final screen:
Debt/Equity less than X-Industry Median: The stocks are less leveraged compared with 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: Asubstantial 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 the optimism, leading to stocks 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 (Strong Buy) or #2 (Buy) have a proven history of success.
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 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 11 stocks that made it through the screen.
LHC Group, Inc. : It offers home health and hospice care serviced to hospitals, physicians and families. The company currently carries a Zacks Rank #1 and witnessed a positive earnings surprise of 10.61% on average in the trailing four quarters.
Tile Shop Holdings, Inc.. : This operates as a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the U.S. The company currently carries a Zacks Rank #2 and witnessed a positive earnings surprise of 15.09% on average 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 partnership witnessed a positive earnings surprise of 14.68% on average in the trailing four quarters. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
KMG Chemicals, Inc. : This global supplier of specialty chemicals and products currently carries a Zacks Rank #2. It witnessed a positive earnings surprise of 5.27% on average in the trailing four quarters.
Schnitzer Steel Industries, Inc. : The company recycles ferrous and nonferrous scrap metals; and manufactures finished steel products worldwide. Currently, it carries a Zacks Rank #2 and witnessed a positive earnings surprise of 71.32% on 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 »
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Worried About Rate Hike? Buy These 5 Low-leverage Stocks
The hike in Fed interest rate last week caught U.S. investors off guard as it brought with an unforeseen projection of three more hikes next year. Of course, a rate hike indicates a stable economy but continued appreciation in the same can result in decelerating corporate profits and eventually a downtrend in economic growth.
Since most industries in the U.S. are highly capital intensive, debt financing has always been an inherent strategy adopted by large corporations in the country to boost their operations. However, debt carries with it the burden of interest payment. Yet, debt financing is more popular than equity financing, probably because of its easy and cheap availability.
Nevertheless, the Fed’s aggressive stance on rate hike has made debt all the more dearer. U.S. companies will now have to bear a much higher cost of capital, which they would most probably try to recover by raising the cost of their products. As a result inflation will shoot up, which despite being an underlying sign of economic strength, will hamper the nation’s export business.
Eventually, exorbitant cost of capital might dissuade corporations from taking debt necessary to boost their production and in turn affect their profit margin. Considering the prevailing rate hike scenario and the fact that the U.S. budget deficit is expected to increaseall the more in the coming years, investors might be reluctant to pick any U.S. stock altogether.
However, this should not discourage investors since the U.S. economy has been debt dependent since its foundation andis still the largest in the world. What they need to do however is choose wisely from those companies that have a lesser debt burden.
This is where the significance of financial leverage ratio comes into play as it measures the extent of financial leverage a company bears. Several leverage ratios have been developed for this purpose, with debt-to-equity ratio being the most popular.
Analyzing Debt-to-Equity Ratio
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.
With the Q3 reporting cycle over for this year, it is quite evident that the growth picture improved from what we saw in the trailing two quarters. Naturally, investors will now target stocks exhibiting solid earnings growth.
But choosing stocks that boast earnings growth only might not be a wise investment strategy. A higher degree of leverage can turn an attractive investment option into a nightmare in times of financial crisis.
The Winning Strategy
It goes without saying that given the current volatile market condition, which is making investors more skeptical by the day, choosing low leverage stocks will be a wise strategy.
However, 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.
Here is the final screen:
Debt/Equity less than X-Industry Median: The stocks are less leveraged compared with 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: Asubstantial 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 the optimism, leading to stocks 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 (Strong Buy) or #2 (Buy) have a proven history of success.
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 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 11 stocks that made it through the screen.
LHC Group, Inc. : It offers home health and hospice care serviced to hospitals, physicians and families. The company currently carries a Zacks Rank #1 and witnessed a positive earnings surprise of 10.61% on average in the trailing four quarters.
Tile Shop Holdings, Inc.. : This operates as a specialty retailer of manufactured and natural stone tiles, setting and maintenance materials, and related accessories in the U.S. The company currently carries a Zacks Rank #2 and witnessed a positive earnings surprise of 15.09% on average 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 partnership witnessed a positive earnings surprise of 14.68% on average in the trailing four quarters. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
KMG Chemicals, Inc. : This global supplier of specialty chemicals and products currently carries a Zacks Rank #2. It witnessed a positive earnings surprise of 5.27% on average in the trailing four quarters.
Schnitzer Steel Industries, Inc. : The company recycles ferrous and nonferrous scrap metals; and manufactures finished steel products worldwide. Currently, it carries a Zacks Rank #2 and witnessed a positive earnings surprise of 71.32% on 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 »