We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Buy These 5 Low Leverage Stocks to Keep Debt Woes at Bay
Read MoreHide Full Article
Leverage is a well-known business strategy to use borrowed funds for financing the purchase of inventory, equipment and other company assets. These funds can also be utilized to repay the company’s prior debt. Companies can obtain such funds either using debt or equity.
Historically, debt financing has been preferred over equity. This is because when a company resorts to debt financing, it incurs fixed expenses in the form of interest payments for a specific time period. However, in case of equity financing, a shareholder not only becomes a company’s partial owner but also gets entitled to a direct claim to its future profits.
Nevertheless, debt financing is not always actually profitable. Particularly, one should keep in mind that debt financing is a feasible option as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even cause a corporation’s bankruptcy in a worst-case scenario.
A high degree of financial leverage means heavy interest payments, which affect a company's bottom line.
Therefore, one should always consider measuring the debt level of a stock before adding it to one’s portfolio.
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.
Analyzing Debt/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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the first-quarter reporting cycle set to start investors might be eyeing stocks that have exhibited solid earnings growth in the recent 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.
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 (Strong Buy) or 2 (Buy) offer the best upside potential.
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 29 stocks that made it through the screen.
Herc Holdings Inc. (HRI - Free Report) : It is an equipment rental supplier in North America. The company has an earnings surprise of 85.40%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.
Quanex Building Product Corporation (NX - Free Report) : It is a manufacturer of components like energy-efficient fenestration products in addition to kitchen and bath cabinet components that are sold to Original Equipment Manufacturers in the building products industry. The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 652.91% in the trailing four quarters, on average.
Nucor Corporation (NUE - Free Report) : It is a leading producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the United States. The company came up with a four-quarter earnings surprise of 46.72%, on average, and sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Titan Machinery Inc. (TITN - Free Report) : It is a renowned dealer of of agricultural, construction, and consumer products. Currently, the company carries a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 345.83%, on average.
Deckers Outdoor Corporation (DECK - Free Report) : It is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities. It currently holds a Zacks Rank #2 and delivered a four-quarter earnings surprise of 485.05%, on average.
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.
Image: Bigstock
Buy These 5 Low Leverage Stocks to Keep Debt Woes at Bay
Leverage is a well-known business strategy to use borrowed funds for financing the purchase of inventory, equipment and other company assets. These funds can also be utilized to repay the company’s prior debt. Companies can obtain such funds either using debt or equity.
Historically, debt financing has been preferred over equity. This is because when a company resorts to debt financing, it incurs fixed expenses in the form of interest payments for a specific time period. However, in case of equity financing, a shareholder not only becomes a company’s partial owner but also gets entitled to a direct claim to its future profits.
Nevertheless, debt financing is not always actually profitable. Particularly, one should keep in mind that debt financing is a feasible option as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even cause a corporation’s bankruptcy in a worst-case scenario.
A high degree of financial leverage means heavy interest payments, which affect a company's bottom line.
Therefore, one should always consider measuring the debt level of a stock before adding it to one’s portfolio.
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.
Analyzing Debt/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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the first-quarter reporting cycle set to start investors might be eyeing stocks that have exhibited solid earnings growth in the recent 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.
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 (Strong Buy) or 2 (Buy) offer the best upside potential.
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 29 stocks that made it through the screen.
Herc Holdings Inc. (HRI - Free Report) : It is an equipment rental supplier in North America. The company has an earnings surprise of 85.40%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.
Quanex Building Product Corporation (NX - Free Report) : It is a manufacturer of components like energy-efficient fenestration products in addition to kitchen and bath cabinet components that are sold to Original Equipment Manufacturers in the building products industry. The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 652.91% in the trailing four quarters, on average.
Nucor Corporation (NUE - Free Report) : It is a leading producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the United States. The company came up with a four-quarter earnings surprise of 46.72%, on average, and sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Titan Machinery Inc. (TITN - Free Report) : It is a renowned dealer of of agricultural, construction, and consumer products. Currently, the company carries a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 345.83%, on average.
Deckers Outdoor Corporation (DECK - Free Report) : It is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports, and other lifestyle-related activities. It currently holds a Zacks Rank #2 and delivered a four-quarter earnings surprise of 485.05%, on average.
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.