Investors often go for stocks exhibiting solid growth history but miss their debt level, which can be detrimental for their future growth if exorbitant. So, if safe investment is your goal, then go for low-leverage stocks like
Boise Cascade ( BCC Quick Quote BCC - Free Report) , Photronics ( PLAB Quick Quote PLAB - Free Report) , HomeStreet ( HMST Quick Quote HMST - Free Report) , DAQO New Energy ( DQ Quick Quote DQ - Free Report) and EPAM Systems ( EPAM Quick Quote EPAM - Free Report) .
For those not familiar with the term, leverage refers to the use of exogenous funds by companies to run their operations smoothly and expand the same. Now, companies can obtain these exogenous funds either through equity financing or debt financing.
Statistically, debt financing is preferred over equity because of its easy and cheap availability.
However, debt financing has its share of drawbacks. Particularly, it is desirable only as long as it successfully generates a higher rate of return compared to the interest rate. So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to exorbitant debt financing.
Therefore, the crux of safe investment lies in choosing a company that is not overburdened with debt as a debt-free stock is almost impossible to find.
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 entire third-quarter earnings season behind us, investors must be eyeing stocks that have exhibited solid earnings growth in the recent past. 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 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 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 we present our five picks out of the 29 stocks that made it through the screen.
Boise Cascade: It operates as a wood products manufacturer and building materials distributor, primarily in the United States and Canada. The company manufactures engineered wood products, plywood, lumber and particleboard and distributes wood products. BCC recently announced that it will build a 10,000 square feet warehouse in Ohio, which will expand its distribution network in the United States. Boise Cascade delivered an earnings surprise of 45.46%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently. Its long-term earnings growth rate is pegged at 2.3%. Photronics: It is a leading worldwide manufacturer of photomasks that offers the manufacturing foundation for state-of-the-art mobile devices, PCs, TVs, displays and a host of other products. This December, PLAB reported its fiscal 2021 results, wherein its revenues reflected solid growth of 9% year over year. Photronics currently carries a Zacks Rank #1. The company delivered an earnings surprise of 12.55% in the trailing four quarters, on average. Fiscal 2022 earnings estimates indicates an improvement of 46.1% from fiscal 2021’s reported earnings. HomeStreet: It is a diversified financial services company, which is engaged in real estate lending, along with offering deposit and investment products and cash management services and single-family loans and commercial loans. HMST recently announced that its commercial banking division is expanding its commercial services into Honolulu, Hawaii. HomeStreet came up with a four-quarter earnings surprise of 22.48%, on average, and carries a Zacks Rank of 2. Its 2021 earnings estimate implies a year-over-year improvement of 53.6%. You can see . the complete list of today’s Zacks #1 Rank stocks here DAQO New Energy: It is engaged in the manufacture and sale of high-quality polysilicon to photovoltaic product manufacturers. The polysilicon is further processed into ingots, wafers, cells and modules for solar power solutions. DAQO New Energy’s highly efficient and technically advanced manufacturing facility in Xinjiang, China currently has a nameplate annual polysilicon production capacity of 70,000 metric tons. Currently, DAQO New Energy sports a Zacks Rank of 1. It delivered a four-quarter earnings surprise of 4.86%, on average. Its 2021 earnings estimate suggests a year-over-year improvement of 615.7%. EPAM Systems: It is well known for its software engineering and IT consulting services. This December, EPAM Systems acquired Optiva Media, a niche professional services firm that provides product development and digital services to leading media companies. EPAM Systems currently carries a Zacks Rank #2 and delivered a four-quarter earnings surprise of 7.21%, on average. Its long-term earnings growth rate estimate is pegged at 28%.
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