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5 Low Leverage Stocks to Buy if You Want to Invest Safely

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Leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. This borrowing can be done either through equity or debt financing.

Empirically, it has been observed that majority of companies prefer debt financing over equity to obtain such funds. This is because debt is cheaper than equity, especially in periods of low interest rates. Moreover, in case of equity financing, a shareholder not only becomes a company’s partial owner but also gets entitled to a direct claim on its future profits. So most companies try to avoid equity financing.

However, not always debt financing is desirable, especially in cases where a company opts for too much of debt. In fact, exorbitant debt financing might even cause a corporation’s bankruptcy in a worst-case scenario. Therefore, the debt level of a company is an important point of consideration while making an investment decision.

So, for a prudent investor, a safe strategy of choosing stocks should also include search for stocks that bear low leverage, apart from other factors. Therefore, measuring the leverage of a particular stock forms an integral part of the safe investment procedure.  

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 this year’s first-quarter reporting cycle almost over, 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.

MarineMax (HZO - Free Report) : It is the United States’ largest recreational boat and yacht retailer.. The company delivered an earnings surprise of 125.82%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.

Titan Machinery (TITN - Free Report) : It owns and operates a network of over 70 full-service agriculture and construction equipment stores across nine states in the United States and six countries in Europe. The company currently has a Zacks Rank #2 and delivered an earnings surprise of 345.83% in the trailing four quarters, on average.

Darling Ingredients (DAR - Free Report) : It is a provider of rendering, cooking oil and bakery waste recycling and recovery solutions. The company came up with a four-quarter earnings surprise of 29.81%, on average, and has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

EchoStar Corporation (SATS - Free Report) : It is a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband internet services for home and small office customers.. Currently, the company carries a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 181.90%, on average.

Targa Resources (TRGP - Free Report) : It is a premier energy infrastructure company. The company currently sports a Zacks Rank #1 and delivered a four-quarter earnings surprise of 115.93%, on average.

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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: