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Bet on These 5 Low-Leverage Stocks As Volatility Spirals
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Wall Street has been losing big time over the past few trading sessions due to skyrocketing oil prices, thanks to the Russia-Ukraine crisis, threatening the global economy. Moreover, the Federal Reserve is expected to raise the interest rate at its meeting, scheduled next week, to tackle the impact of the ongoing war and rising inflation.
So, the overall investment environment right now may seem to be a little bit unfavorable. Investors like low interest rates as these boost the price of stocks.
However, this should not discourage investors from trading in the stock market altogether. Instead, the need of the hour is to choose safe-haven stocks like AdvanSix (ASIX - Free Report) , Warrior Met Coal (HCC - Free Report) , Western Midstream Partners (WES - Free Report) , Chevron (CVX - Free Report) and Exxon Mobil (XOM - Free Report) , which bear low leverage.
Before investing, one should be aware of the concept of low leverage and its role in investment.
To start with, the term leverage is used to denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing, But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
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 avert companies that resort to exorbitant debt financing.
Therefore, the crux of safe investment lies in choosing a company that is not burdened with debt as a debt-free stock is almost impossible to find.
Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks, which bear low leverage and are hence are less risky.
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 fourth-quarter earnings cycle almost at its end, 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 (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.
AdvanSix: It is a producer and supplier of Nylon 6 materials. ASIX announced its fourth-quarter 2021 results in February, with year-over-year sales growth of 45%. The company also announced it has agreed to acquire U.S. Amines, which is a leading North American producer of alkyl and specialty amines, for $100 million. This should strengthen AdvanSix’s position in the chemical industry.
AdvanSix delivered an earnings surprise of 23.63%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 12.4% in the past 60 days.
Warrior Met Coal: It is a producer and exporter of premium metallurgical coal. HCC announced its fourth-quarter 2021 results in February, with year-over-year revenue growth of 95.8%. The company also announced that its board of directors had increased its dividend by 20%, which reflects the stock’s solid financial position.
Warrior Met currently sports a Zacks Rank #1. The company delivered an earnings surprise of 84.48% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 57.8% in the past 60 days.
Western Midstream Partners: It operates, acquires and develops midstream energy assets. WES declared a quarterly cash distribution of 32.7 cents per unit for the fourth quarter of 2021, up 1.3% from the prior quarter’s distribution, in February.
Chevron: It is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. In January 2022, CVX declared a quarterly dividend of $1.42 per share, an increase of 6%, which reflects the stock’s solid financial position.
Currently, Chevron has a Zacks Rank of 1. It delivered a four-quarter earnings surprise of 6.28%, on average. Its 2022 earnings estimate has improved 22.3% over the past 60 days.
Exxon Mobil: It is one of the world's largest publicly traded international oil and gas companies. Exxon Mobil recently announced its plans at its annual Investor Day to deliver industry-leading earnings, cash flow growth and shareholder returns, and lead in the energy transition across a range of lower-emissions scenarios. To improve future earnings, XOM is upgrading its portfolio with low-cost-of-supply opportunities by investing in advantaged assets, including Guyana and the U.S. Permian Basin.
Exxon Mobil currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 5.81%, on average. Its long-term earnings growth estimate is 18%.
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.
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Bet on These 5 Low-Leverage Stocks As Volatility Spirals
Wall Street has been losing big time over the past few trading sessions due to skyrocketing oil prices, thanks to the Russia-Ukraine crisis, threatening the global economy. Moreover, the Federal Reserve is expected to raise the interest rate at its meeting, scheduled next week, to tackle the impact of the ongoing war and rising inflation.
So, the overall investment environment right now may seem to be a little bit unfavorable. Investors like low interest rates as these boost the price of stocks.
However, this should not discourage investors from trading in the stock market altogether. Instead, the need of the hour is to choose safe-haven stocks like AdvanSix (ASIX - Free Report) , Warrior Met Coal (HCC - Free Report) , Western Midstream Partners (WES - Free Report) , Chevron (CVX - Free Report) and Exxon Mobil (XOM - Free Report) , which bear low leverage.
Before investing, one should be aware of the concept of low leverage and its role in investment.
To start with, the term leverage is used to denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing, But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
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 avert companies that resort to exorbitant debt financing.
Therefore, the crux of safe investment lies in choosing a company that is not burdened with debt as a debt-free stock is almost impossible to find.
Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks, which bear low leverage and are hence are less risky.
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 fourth-quarter earnings cycle almost at its end, 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 (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.
AdvanSix: It is a producer and supplier of Nylon 6 materials. ASIX announced its fourth-quarter 2021 results in February, with year-over-year sales growth of 45%. The company also announced it has agreed to acquire U.S. Amines, which is a leading North American producer of alkyl and specialty amines, for $100 million. This should strengthen AdvanSix’s position in the chemical industry.
AdvanSix delivered an earnings surprise of 23.63%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 12.4% in the past 60 days.
Warrior Met Coal: It is a producer and exporter of premium metallurgical coal. HCC announced its fourth-quarter 2021 results in February, with year-over-year revenue growth of 95.8%. The company also announced that its board of directors had increased its dividend by 20%, which reflects the stock’s solid financial position.
Warrior Met currently sports a Zacks Rank #1. The company delivered an earnings surprise of 84.48% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 57.8% in the past 60 days.
Western Midstream Partners: It operates, acquires and develops midstream energy assets. WES declared a quarterly cash distribution of 32.7 cents per unit for the fourth quarter of 2021, up 1.3% from the prior quarter’s distribution, in February.
Western Midstream carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2022 earnings has moved up 4.7% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chevron: It is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. In January 2022, CVX declared a quarterly dividend of $1.42 per share, an increase of 6%, which reflects the stock’s solid financial position.
Currently, Chevron has a Zacks Rank of 1. It delivered a four-quarter earnings surprise of 6.28%, on average. Its 2022 earnings estimate has improved 22.3% over the past 60 days.
Exxon Mobil: It is one of the world's largest publicly traded international oil and gas companies. Exxon Mobil recently announced its plans at its annual Investor Day to deliver industry-leading earnings, cash flow growth and shareholder returns, and lead in the energy transition across a range of lower-emissions scenarios. To improve future earnings, XOM is upgrading its portfolio with low-cost-of-supply opportunities by investing in advantaged assets, including Guyana and the U.S. Permian Basin.
Exxon Mobil currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 5.81%, on average. Its long-term earnings growth estimate is 18%.
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.