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Want to Escape Debt Traps? Buy These 5 Low-Leverage Stocks

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Are you new to the investment world? Then you must frequently be looking for growth-yielding stocks. In this context, it is advisable that you also take a look at the debt level of the stocks to avoid a debt trap. You may thus buy low-leverage stocks like Franklin Electric (FELE - Free Report) , Schneider National (SNDR - Free Report) , Teradyne (TER - Free Report) , The Mosaic Company (MOS - Free Report) and Saia Inc. (SAIA - Free Report) .  

The next question that might come to your mind is what leverage is and how to zero in on low-leverage stocks. As far as the term leverage is concerned, it refers to the strategy of borrowed capital that companies use to run their operations. Now, the relation between leverage and debt lies in the fact that the majority of the firms prefer debt financing over equity financing to avoid equity dilution for capital borrowing.  

Therefore, in most cases, leverage indicates debt financing. However, debt financing is not always desirable and remains a feasible option only as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even lead to a corporation’s bankruptcy in the worst-case scenario.

It is for this reason that while choosing a safe-bet stock, a prudent investor should be aware of its debt level. If a stock is highly leveraged, which means it is burdened with high debt, it is wise to avoid it.

Considering the aforementioned discussion, a low-leverage stock should find a place in an investor’s portfolio. For measuring this leverage, several ratios have been used historically. The debt-to-equity ratio is one of the most common among such 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 fourth-quarter earnings cycle knocking on our doors, 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.

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 or 2 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 19 stocks that made it through the screen.

Franklin Electric: It is a global leader in the production and marketing of systems and components for the movement of water and automotive fuels. Franklin Electric recently acquired Blake Group Holdings, Inc., a Connecticut corporation, for $27.1 million in cash. This transaction will boost Franklin Electric’s footprint in the New York and New England markets, thereby bolstering its objective of being the leading source of distribution for water systems solutions in the United States.

Franklin Electric delivered an earnings surprise of 16.27%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for FELE’s 2022 earnings has moved up 0.6% in the past 60 days.

Schneider National: It is a leading transportation and logistics services company. Schneider National recently announced that the company is expanding its intermodal service by moving its primary western United States rail partnership to Union Pacific beginning in 2023. This should boost the SNDR’s revenues in the long term.

Schneider National currently carries a Zacks Rank #1. The company delivered an earnings surprise of 21.04% in the trailing four quarters, on average. SNDR boasts a long-term earnings growth rate of 20.7%.

Teradyne: It is a leading provider of automated test equipment, with a primary focus on the semiconductor test market. Teradyne reported third-quarter 2021 revenue growth of 16% on a year-over-year basis, while its adjusted earnings improved 35%.

Teradyne came up with a four-quarter earnings surprise of 9.32%, on average, and carries a Zacks Rank of 2. TER boasts a long-term earnings growth rate of 14.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Mosaic Company: It is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. Mosaic targets to achieve net-zero greenhouse gas emissions in Florida, by 2030 and companywide by 2040. This should boost MOS’ position in the clean energy space.

Currently, Mosaic carries a Zacks Rank of 2. It delivered a four-quarter earnings surprise of 38.06%, on average. Mosaic boasts a long-term earnings growth rate of 7%.

Saia: It is a leading transportation company that provides a variety of trucking transportation and supply chain solutions to a broad range of industries, including the retail, petrochemical and manufacturing industries. SAIA recently partnered with Daimler Trucks North America to test a battery-electric Freightliner eM2 box truck in its Portland, Oregon pickup and delivery operations. This will help Saia integrate electric vehicles into its fleet.

Saia currently has a Zacks Rank #2 and delivered a four-quarter earnings surprise of 14.75%, on average. Its long-term earnings growth rate estimate is 35.7%.

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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
: https://www.zacks.com/performance.