It’s time for equity investors to celebrate as the global stock market seems to have overcome the major pandemic blues. As stated by a BloombergQuint report, global equities are on course to rise for 11 straight sessions -- the longest stretch since 2009. This surely will tempt investors to add stocks in their portfolio.
But, as a cautionary measure, a prudent investor should always analyze the debt value of a company before choosing it. This is because a debt-ridden stock is never good for your portfolio since it brings with it the burden of interest payments.
This is where the term “leverage” comes into play. Also known as debt financing, it is basically the use of exogenous funds that companies utilize to run their operations smoothly along with expanding the same. Since no corporation possesses endless capital, majority of the firms resort to debt financing.
However, a company is a safe investment bet as long as it can generate higher return of rate compared to the interest rate from debt financing. Therefore, investors tend to avoid overtly burdened stocks.
Since, a debt -free stock is unlikely to be available, an investor must choose stocks that are not highly leveraged. 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.
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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the Q4 reporting cycle ongoing, investors might be eyeing stocks that have exhibited solid earnings growth in the prior quarters. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, 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.
However, an investment strategy based solely on 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. : 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. VGM Score of A or B 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 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 25 stocks that made it through the screen.
Janus Henderson Group ( JHG Quick Quote JHG - Free Report) : It is an investment management company that provides investment advisors for equities, fixed income, property and private equity sectors. The company delivered an earnings surprise of 22.26%, on average, in the trailing four quarters and currently sports a Zacks Rank #1. Plexus Corp. ( PLXS Quick Quote PLXS - Free Report) : It offers electronic contract manufacturing services to original equipment manufacturers (OEMs) in a wide range of industries. The company currently has a Zacks Rank #2 and delivered an earnings surprise of 29.50% in the trailing four quarters, on average. Selective Insurance Group ( SIGI Quick Quote SIGI - Free Report) : It operates as a property and casualty insurer, offering its services across the United States. The company came up with a four-quarter earnings surprise of 13.18%, on average, and carries a Zacks Rank #2. You can see . the complete list of today’s Zacks #1 Rank stocks here D.R. Horton ( DHI Quick Quote DHI - Free Report) : It is one of the leading national homebuilders, primarily engaged in the construction and sale of single-family houses both in the entry-level and move-up markets. Currently, the company sports a Zacks Rank #1 and came up with a four-quarter earnings surprise of 25.80%, on average. Axcelis Technologies ( ACLS Quick Quote ACLS - Free Report) : It is a leading producer of ion implantation equipment used in the fabrication of semiconductors. It currently holds a Zacks Rank #2 and delivered a four-quarter earnings surprise of 23.33%, on average.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: . https://www.zacks.com/performance