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With Donald Trump set to be sworn in as the U.S. president today, there is a lot of uncertainty in the global markets. Many analysts remain skeptical as to how this real-estate mogul’s new economic policies will affect the nation in the future. And uncertainty is never good for the stock markets.
In addition to this, mounting U.S. debt and rising deficits have made it all the more difficult for investors to determine whether it’s safe to pour money in U.S. stocks. With capital being one of the basic factors of production, only a few fortunate can escape from the realm of debt. The word “debt” is unnerving for many.
This is because too much debt can be detrimental as companies with large debt loads are more vulnerable during economic downturns and can even go bankrupt in the worst case scenario.Of course, this does not mean that debt financing, which is an inherent instrument for corporations to grow their earnings, should be a taboo in corporate financing.
Nevertheless, considering the fact that debt ridden companies are more vulnerable at times of volatility, it is safe to avoid those for achieving optimal returns.
And here comes the importance of leverage, which indicates the level of debt a corporation carries at present. Empirically several leverage ratios have been constructed to measure the exact amount of debt risk a company bears in order to safeguard investors from debt traps.
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 indicates the amount of financial risk a company bears. A lower debt-to-equity ratio implies a more financially stable business, thereby making it a more worthy investment opportunity.
With the fourth–quarter earnings season set to pick up pace by next week, investors must be gearing up to put their money in stocks exhibiting a surge in earnings. But if the stocks bear a high debt-to-equity ratio, in times of economic downturns, their so-called booming earnings picture might turn into a nightmare.
So, instead of targeting stocks showing an earnings boom, which might be short-lived, it will be wise for investors to select those with low leverage.These are financially more secure and immune to financial bankruptcy.
Choosing a Winning Strategy
Considering the above discussion, it is imperative that a sensible investor chooses stocks bearing low debt-to-equity ratios. 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 matterwhether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 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 21 stocks that made it through the screen.
Extended Stay America, Inc. : This company owns and operates hotels in the U.S. and Canada. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 8.02% in the trailing four quarters.
Walgreens Boots Alliance, Inc. (WBA - Free Report) : It operates as a pharmacy-led health and wellbeing company. The company currently carries a Zacks Rank #2 and witnessed a positive earnings surprise of 3.92% on an average in the trailing four quarters.
Barnes & Noble, Inc.: This company operates as a content and commerce company in the U.S. It witnessed a positive earnings surprise of 3.95% 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.
Universal Health Services, Inc. (UHS - Free Report) :This company owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 0.28% on an average in the trailing four quarters.
Greif, Inc. (GEF - Free Report) : This company produces and sells industrial packaging products. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 6.41% in its last reported quarter.
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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Buy these 5 Low Leverage Stocks to Be Safe
With Donald Trump set to be sworn in as the U.S. president today, there is a lot of uncertainty in the global markets. Many analysts remain skeptical as to how this real-estate mogul’s new economic policies will affect the nation in the future. And uncertainty is never good for the stock markets.
In addition to this, mounting U.S. debt and rising deficits have made it all the more difficult for investors to determine whether it’s safe to pour money in U.S. stocks. With capital being one of the basic factors of production, only a few fortunate can escape from the realm of debt. The word “debt” is unnerving for many.
This is because too much debt can be detrimental as companies with large debt loads are more vulnerable during economic downturns and can even go bankrupt in the worst case scenario.Of course, this does not mean that debt financing, which is an inherent instrument for corporations to grow their earnings, should be a taboo in corporate financing.
Nevertheless, considering the fact that debt ridden companies are more vulnerable at times of volatility, it is safe to avoid those for achieving optimal returns.
And here comes the importance of leverage, which indicates the level of debt a corporation carries at present. Empirically several leverage ratios have been constructed to measure the exact amount of debt risk a company bears in order to safeguard investors from debt traps.
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 indicates the amount of financial risk a company bears. A lower debt-to-equity ratio implies a more financially stable business, thereby making it a more worthy investment opportunity.
With the fourth–quarter earnings season set to pick up pace by next week, investors must be gearing up to put their money in stocks exhibiting a surge in earnings. But if the stocks bear a high debt-to-equity ratio, in times of economic downturns, their so-called booming earnings picture might turn into a nightmare.
So, instead of targeting stocks showing an earnings boom, which might be short-lived, it will be wise for investors to select those with low leverage.These are financially more secure and immune to financial bankruptcy.
Choosing a Winning Strategy
Considering the above discussion, it is imperative that a sensible investor chooses stocks bearing low debt-to-equity ratios. 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 matterwhether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 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 21 stocks that made it through the screen.
Extended Stay America, Inc. : This company owns and operates hotels in the U.S. and Canada. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 8.02% in the trailing four quarters.
Walgreens Boots Alliance, Inc. (WBA - Free Report) : It operates as a pharmacy-led health and wellbeing company. The company currently carries a Zacks Rank #2 and witnessed a positive earnings surprise of 3.92% on an average in the trailing four quarters.
Barnes & Noble, Inc. : This company operates as a content and commerce company in the U.S. It witnessed a positive earnings surprise of 3.95% 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.
Universal Health Services, Inc. (UHS - Free Report) :This company owns and operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 0.28% on an average in the trailing four quarters.
Greif, Inc. (GEF - Free Report) : This company produces and sells industrial packaging products. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 6.41% in its last reported quarter.
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 »