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Buy These 5 Low-Leverage Stocks Amid Slight Dip in Inflation
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Although Wall Street rebounded last Friday from its seven-week decline, most probably buoyed by the latest decline witnessed in U.S. inflation data, there is still doubt whether this recovery is short-lived or a long-term affair.
In this backdrop, some might feel shaky about investing in stocks, fearing that a sudden market depression may cause them a huge loss. However, experts suggest that this is the right time to buy some stocks as their prices are low and thus affordable. Now selecting some cheap stocks is easier but one should keep in mind that the selected stocks like Packaging Corporation of America (PKG - Free Report) , Skyline (SKY - Free Report) , LouisianaPacific (LPX - Free Report) , TotalEnergies (TTE - Free Report) and Huntsman (HUN - Free Report) should bear low leverage to avoid losing it all in the face of a sudden crisis.
Now, first choosing low leverage stocks, one should know what leverage is.
In finance, leverage is a term 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 avoid 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 first-quarter earnings cycle almost over, 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 31 stocks that made it through the screen.
Packaging Corporation: It is the third-largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. In May 2022, Packaging Corporation revealed that it intends to increase the quarterly cash dividend on its common stock to an annual payout of $5.00 per share from $4.00 per share, reflecting a 25% increase.
PKG delivered an earnings surprise of 19.55%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 10.3% in the past 60 days.
Skyline: It designs, produces and distributes manufactured housing and recreational vehicles. In May 2022, Champion Home Builders, a subsidiary of Skyline, announced its acquisition agreement of substantially all the operating assets of Manis Custom Builders, Inc. and related companies, located in Laurinburg, NC, for approximately $10 million.
SKY currently sports a Zacks Rank #1. The company delivered an earnings surprise of 45.32% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 14.3% in the past 60 days.
LouisianaPacific: It is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction. In May 2022, the company announced the first production of LP SmartSide products at its Houlton, ME, facility.
LPX carries a Zacks Rank #2 and delivered an earnings surprise of 13.98%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 19.6% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
TotalEnergies: It is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. In May 2022, TotalEnergies announced its signature of agreements with Global Infrastructure Partners (GIP) to acquire 50% of Clearway Energy Group (CEG), the 5th US renewable energy player. This constitutes its largest acquisition in the renewable energy space in the United States, one of the top three renewable markets in the world.
Currently, TTE has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 6.6%. The Zacks Consensus Estimate for 2022 earnings has improved 30.9% over the past 60 days.
Huntsman: It is among the world's largest manufacturers of differentiated and commodity chemical products. In May 2022, Huntsman announced that its wholly owned subsidiary, Huntsman International LLC, has entered into a new $1.2 billion senior unsecured, sustainability-linked revolving credit facility to replace the existing $1.2 billion senior unsecured revolving credit facility expiring in May of 2023.
HUN currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 12.63%, on average. The consensus estimate for 2022 earnings has improved 11.7% over the past 60 days.
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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Buy These 5 Low-Leverage Stocks Amid Slight Dip in Inflation
Although Wall Street rebounded last Friday from its seven-week decline, most probably buoyed by the latest decline witnessed in U.S. inflation data, there is still doubt whether this recovery is short-lived or a long-term affair.
In this backdrop, some might feel shaky about investing in stocks, fearing that a sudden market depression may cause them a huge loss. However, experts suggest that this is the right time to buy some stocks as their prices are low and thus affordable. Now selecting some cheap stocks is easier but one should keep in mind that the selected stocks like Packaging Corporation of America (PKG - Free Report) , Skyline (SKY - Free Report) , LouisianaPacific (LPX - Free Report) , TotalEnergies (TTE - Free Report) and Huntsman (HUN - Free Report) should bear low leverage to avoid losing it all in the face of a sudden crisis.
Now, first choosing low leverage stocks, one should know what leverage is.
In finance, leverage is a term 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 avoid 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 first-quarter earnings cycle almost over, 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 31 stocks that made it through the screen.
Packaging Corporation: It is the third-largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. In May 2022, Packaging Corporation revealed that it intends to increase the quarterly cash dividend on its common stock to an annual payout of $5.00 per share from $4.00 per share, reflecting a 25% increase.
PKG delivered an earnings surprise of 19.55%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 10.3% in the past 60 days.
Skyline: It designs, produces and distributes manufactured housing and recreational vehicles. In May 2022, Champion Home Builders, a subsidiary of Skyline, announced its acquisition agreement of substantially all the operating assets of Manis Custom Builders, Inc. and related companies, located in Laurinburg, NC, for approximately $10 million.
SKY currently sports a Zacks Rank #1. The company delivered an earnings surprise of 45.32% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 14.3% in the past 60 days.
LouisianaPacific: It is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for use in residential, industrial and light commercial construction. In May 2022, the company announced the first production of LP SmartSide products at its Houlton, ME, facility.
LPX carries a Zacks Rank #2 and delivered an earnings surprise of 13.98%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 19.6% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
TotalEnergies: It is among the top five publicly traded global integrated oil and gas companies based on production volumes, proved reserves and market capitalization. In May 2022, TotalEnergies announced its signature of agreements with Global Infrastructure Partners (GIP) to acquire 50% of Clearway Energy Group (CEG), the 5th US renewable energy player. This constitutes its largest acquisition in the renewable energy space in the United States, one of the top three renewable markets in the world.
Currently, TTE has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 6.6%. The Zacks Consensus Estimate for 2022 earnings has improved 30.9% over the past 60 days.
Huntsman: It is among the world's largest manufacturers of differentiated and commodity chemical products. In May 2022, Huntsman announced that its wholly owned subsidiary, Huntsman International LLC, has entered into a new $1.2 billion senior unsecured, sustainability-linked revolving credit facility to replace the existing $1.2 billion senior unsecured revolving credit facility expiring in May of 2023.
HUN currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 12.63%, on average. The consensus estimate for 2022 earnings has improved 11.7% over the past 60 days.
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