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Bet on These 5 Low-Leverage Stocks to Counter Inflation Woes

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U.S. stocks fell sharply on Apr 26 as a result of increasing concerns related to the spread of COVID-19 in China and fears of it spreading elsewhere. The ongoing war in Ukraine and inflationary pressure further spooked investors.

Amid such uncertainties, investors often turn shaky. But instead of shying away from investing altogether, they can choose less risky stocks like Warrior Met Coal (HCC - Free Report) , Valero Energy (VLO - Free Report) ,  Credicorp (BAP - Free Report) , EOG Resources (EOG - Free Report) and Marathon Oil (MRO - Free Report) that bear low leverage.

Now, this might lead to the question of why one should choose low leverage stocks. To answer this, we must first be aware of what leverage is.

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 lower debt-to-equity ratio reflects improved solvency for a company.

With the start of the first-quarter earnings cycle, 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 48 stocks that made it through the screen.

Warrior Met Coal: It is a producer and exporter of premium metallurgical coal. In February 2022, HCC announced that its board of directors approved an increase in the regular quarterly cash dividend by 20%

Warrior Met Coal delivered an earnings surprise of 84.48%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 74.1% 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 75.74% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 33% 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 in fourth-quarter 2021 and the 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 5.4% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

EOG Resources: It is primarily involved in exploring and producing oil and natural gas. In February 2022, EOG Resources reported its fourth quarter and full-year 2021 results. Its quarterly revenues amounted to $6,044 million, reflecting a year-over-year improvement of 124.3%, while its 2021 revenues of $18.64 billion rose 69% from the 2020 figure.

Currently, EOG has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 30.4%. Its Earnings estimates for 2022 have improved 37.1% over the past 60 days.

Marathon Oil: It is a leading oil and natural gas exploration and production company with operations in the United States and Africa. In February 2022, the company reported its fourth-quarter 2021 adjusted EPS of 77 cents, which improved significantly from a loss of 12 cents incurred in fourth-quarter 2020.

MRO currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 37.39%, on average.  The consensus estimate for 2022 earnings has improved 51% 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 at:
https://www.zacks.com/performance