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Buy These 5 Low-Leverage Stocks Irrespective of Rate Hike
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Fed Chairperson Janet Yellen has mostly been in favor of a rate hike and the current growth pace of the U.S. economy is surely paving the way for one. In fact, in a recent press conference, she stated that it would be “unwise” to keep on delaying interest rate hikes, thereby keeping the door open for a rate hike in next month’s scheduled FOMC meeting.
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. Although debt is easily available, it carries with it the burden of interest payment and a rate hike would make it all the more dearer for the companies.
Yellen however has expressed concern over the uncertain economic policy under Trump administration. She fears that if the rate hike does not take place in the near term, a sharp surge might occur later, which will drag the nation into recession.
So, a rate hike is inevitable and the Fed had already made it clear last December when it raised the rate and cited the possibility of three more hikes in 2017. Nevertheless, a possible rate hike should not discourage investors since the U.S. economy has been debt dependent since its foundation and yet stands atop other nations in the world.
What investors need to do now is to pick companies that have a lesser debt burden. This is because heavily debt ridden companies are more prone to bankruptcy at times of financial crisis.
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.
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.
With the fourth-quarter earnings season almost over for 2016, it is quite evident that the growth picture improved from what we saw in the trailing couple of quarters. Naturally, investors will now target stocks exhibiting solid earnings growth.
But choosing stocks with great 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 uncertainty as to whether a rate hike will take place or not and how the U.S. economy is going to perform under Trump, 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 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 nine stocks that made it through the screen.
Insight Enterprises, Inc. (NSIT - Free Report) : This company is a global technology corporation that provides information technology (IT) hardware, software, cloud, and service solutions. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 6.80% in the trailing four quarters.
Ross Stores, Inc. (ROST - Free Report) : It operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. The company carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 1.93% in the trailing four quarters.
Imperial Oil Limited (IMO - Free Report) : This company explores, produces and sells crude oil and natural gas in Canada. Imperial Oil witnessed a positive earnings surprise of 31.47% on an average in the trailing four quarters. It carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Huntington Ingalls Industries, Inc. (HII - Free Report) : This largest ship builder in the U.S. engages in designing, building, overhauling, and repairing of ships. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 19.85% in the trailing four quarters.
WellCare Health Plans, Inc. : This company offers managed care services for government-sponsored health care programs. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 62.73% last 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 Irrespective of Rate Hike
Fed Chairperson Janet Yellen has mostly been in favor of a rate hike and the current growth pace of the U.S. economy is surely paving the way for one. In fact, in a recent press conference, she stated that it would be “unwise” to keep on delaying interest rate hikes, thereby keeping the door open for a rate hike in next month’s scheduled FOMC meeting.
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. Although debt is easily available, it carries with it the burden of interest payment and a rate hike would make it all the more dearer for the companies.
Yellen however has expressed concern over the uncertain economic policy under Trump administration. She fears that if the rate hike does not take place in the near term, a sharp surge might occur later, which will drag the nation into recession.
So, a rate hike is inevitable and the Fed had already made it clear last December when it raised the rate and cited the possibility of three more hikes in 2017. Nevertheless, a possible rate hike should not discourage investors since the U.S. economy has been debt dependent since its foundation and yet stands atop other nations in the world.
What investors need to do now is to pick companies that have a lesser debt burden. This is because heavily debt ridden companies are more prone to bankruptcy at times of financial crisis.
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.
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.
With the fourth-quarter earnings season almost over for 2016, it is quite evident that the growth picture improved from what we saw in the trailing couple of quarters. Naturally, investors will now target stocks exhibiting solid earnings growth.
But choosing stocks with great 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 uncertainty as to whether a rate hike will take place or not and how the U.S. economy is going to perform under Trump, 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 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 nine stocks that made it through the screen.
Insight Enterprises, Inc. (NSIT - Free Report) : This company is a global technology corporation that provides information technology (IT) hardware, software, cloud, and service solutions. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 6.80% in the trailing four quarters.
Ross Stores, Inc. (ROST - Free Report) : It operates off-price retail apparel and home fashion stores under the Ross Dress for Less and dds DISCOUNTS brand names in the United States. The company carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 1.93% in the trailing four quarters.
Imperial Oil Limited (IMO - Free Report) : This company explores, produces and sells crude oil and natural gas in Canada. Imperial Oil witnessed a positive earnings surprise of 31.47% on an average in the trailing four quarters. It carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Huntington Ingalls Industries, Inc. (HII - Free Report) : This largest ship builder in the U.S. engages in designing, building, overhauling, and repairing of ships. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 19.85% in the trailing four quarters.
WellCare Health Plans, Inc. : This company offers managed care services for government-sponsored health care programs. It carries a Zacks Rank #2 and witnessed a positive earnings surprise of 62.73% last 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 »