Thanks to the 4.5-point drop observed in the consumer confidence index in June, Wall Street once again stumbled yesterday.
This may lead an investor to consider whether they should stay invested in the equity market. Nevertheless, it is during such tumultuous times that one should buy stocks as their prices are low. Once the situation improves, these investments will bring gains for the investor. Notably, stocks like
Quanex Building Product ( NX Quick Quote NX - Free Report) , Valero Energy ( VLO Quick Quote VLO - Free Report) , Suncor Energy ( SU Quick Quote SU - Free Report) , Matson ( MATX Quick Quote MATX - Free Report) and Photronics ( PLAB Quick Quote PLAB - Free Report) bear low leverage and therefore can shield investors from incurring losses.
Now, before selecting low leverage stocks, let’s explore what leverage is and how choosing a low leverage stock helps investors.
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 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.
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 second-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 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. : 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. VGM Score of A or B 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 34 stocks that made it through the screen.
Quanex Building Products: It is an industry-leading manufacturer of components sold to Original Equipment Manufacturers in the building products industry. In June 2022, the company reported its second-quarter 2022 results, wherein its sales improved 19.4% year over year.
NX delivered an earnings surprise of 30.20%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings implies a 34.3% improvement year over year.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In June 2022, Valero declared that the company has reduced its debt by approximately $300 million through the acquisition of $300 million of 4% Gulf Opportunity Zone Revenue Bonds Series 2010.
VLO currently sports a Zacks Rank #1. The company delivered an earnings surprise of 84.26% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 33% improvement year over year.
Suncor Energy: It is Canada's premier integrated energy company. The company's operations include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining, and product marketing. In June 2022, Suncor released its 2022 Report on Sustainability and Climate Report today. The reports highlight how Suncor is working to achieve exceptional environmental, social and governance (ESG) performance. SU carries a Zacks Rank #2 and delivered an earnings surprise of 3.58%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 30.5% improvement year over year. You can see the complete list of today’s Zacks #1 Rank stocks here. Matson: It operates as an ocean transportation and logistics company. In June 2022, its board of directors declared a 3.3% increase in the quarterly dividend.
Currently, MATX has a Zacks Rank of 2 and delivered an earnings surprise of 2.11%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings implies a 13% improvement year over year.
Photronics: It is a leading worldwide manufacturer of photomasks, which are high-precision quartz plates that contain microscopic images of electronic circuits. In May 2022, the company released its second-quarter fiscal 2022 results, wherein its revenues improved 28% year over year.
PLAB currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 23.65%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings suggests a 23.3% improvement year over year.
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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