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Bet on These 5 Low-Leverage Stocks to Avoid Inflation Impacts

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Investor sentiment in the U.S. stock market seems quite soft right now, with red-hot inflation affecting the American economy. Hence, investors might find it risky to spend money on equities.

Nonetheless, keeping in mind the fact that the stock market faces such challenges off and on, sometimes in the form of price hikes and geopolitical uncertainties, one should not totally refrain from investing in stocks. In such uncertain periods, what one should do is to go for safe stocks like National Fuel Gas (NFG - Free Report) , Valero Energy (VLO - Free Report) , Credicorp (BAP - Free Report) , Suncor Energy (SU - Free Report) and Ryder Systems (R - Free Report) that bear low leverage.

Now to choose low leverage stocks, one must know the concept of leverage.

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 the 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. 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.

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

So, for a prudent investor, a safe strategy for choosing stocks should also include searching for stocks that bear low leverage, in addition to other factors.

Therefore, measuring the leverage of a particular stock forms an integral part of a 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 lower debt-to-equity ratio reflects improved solvency for a company.

With the first-quarter earnings cycle right ahead of 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 downturn, 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.

Yet, 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 33 stocks that made it through the screen.

National Fuel Gas: It is an integrated energy company that has natural gas assets located in the prolific Appalachian basin and oil-producing assets in California. At the onset of March 2022, NFG joined a newly formed consortium, namely Building the Clean Hydrogen Economy. This should boost this stock’s position in the renewable energy market.

National Fuel Gas delivered an earnings surprise of 12.4%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2022 earnings has moved up 7.6% in the past 60 days.

Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. VLO reduced long-term debt by approximately $750 million in February 2022 through previously announced debt reduction and refinancing transactions.

Valero Energy currently carries a Zacks Rank #2. The company delivered an earnings surprise of 75.7% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 21.1% in the past 60 days.

Credicorp: It is the largest financial services holding company in Peru, with extensive experience in the Peruvian financial market. Its net interest income increased 19.8% year over year for fourth-quarter 2021 and efficiency ratio expanded 230 basis points.

BAP carries a Zacks Rank #2 and boasts a long-term earnings growth rate of 22.5%. The Zacks Consensus Estimate for 2022 earnings has moved up 13.7% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Suncor Energy: It is a premier integrated energy company. Its operations include oil sands development and upgrade, conventional and offshore crude oil and gas production, petroleum refining as well as product marketing. Suncor reported fourth-quarter 2021 adjusted operating earnings of 89 cents per share, reflecting a turnaround from the adjusted operating loss of 7 cents incurred in the prior-year period.

Currently, Suncor has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 13.7%. Its 2022 earnings estimate has improved 14.9% over the past 60 days.

Ryder Systems: It is recognized as one of the world's largest providers of integrated logistics and transportation solutions. In March 2022, Ryder Systems announced that Southern Glazer’s selected Ryder to restructure its inbound transportation and implement one-of-a-kind visibility and collaborative logistics technology, RyderShare.

Ryder Systems currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 57.51%, on average. R’s 2022 earnings estimate has improved 29.7% over the past 60 days.

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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 a
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