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U.S. stock indices ended in the red, following weaker-than-expected earnings of big banks. Investors might have also been spooked by the market consensus that aggressive measures by the Federal Reserve to control soaring prices might push America into a recession.
Against this backdrop, one might not feel confident about investing in stocks. Nevertheless, this must not stop equity investment. Instead, one should pick a stock that has the potential to bring solid returns. Keeping this in mind, we recommend stocks like Arch Resources (ARCH - Free Report) , Valero Energy (VLO - Free Report) , Apple Hospitality REIT (APLE - Free Report) , Matson (MATX - Free Report) and Covenant Logistics Group (CVLG - Free Report) , which bear low leverage and therefore can shield investors from incurring losses in times of crisis.
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.
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 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.
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 37 stocks that made it through the screen.
Arch Resources: It is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The company’s June 2022 sustainability report included a robust discussion on the company's significant and ongoing progress in its 10-year pivot toward global steel and metallurgical coal markets, which are expected to play an essential role in the build-out of a new, low-carbon economy.
ARCH delivered an earnings surprise of 10.71%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings implies a 210% improvement from the 2021 reported figure.
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 35.4% improvement year over year.
Apple Hospitality REIT: It is a real estate investment trust. Its portfolio consists of hotels, guest rooms and resorts. In June 2022, Apple Hospitality REIT announced the recipients of the company’s 2021 Apple Awards.
APLE carries a Zacks Rank #2 and delivered an earnings surprise of 16.93%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 26.9% improvement from the 2021 figure. 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 1 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 from the 2021 reported figure.
Covenant Logistics: It offers a portfolio of transportation and logistics services, through its subsidiaries. In May 2022, the company’s board of directors approved a new stock repurchase authorization of up to $75 million following the recent completion of the previously announced $30 million 10b5-1 repurchase plan.
CVLG currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 27.97%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings suggests a 10.7% improvement from the 2021 reported figure.
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.
Image: Bigstock
5 Low Leverage Stocks to Buy Amid Market Turmoil
U.S. stock indices ended in the red, following weaker-than-expected earnings of big banks. Investors might have also been spooked by the market consensus that aggressive measures by the Federal Reserve to control soaring prices might push America into a recession.
Against this backdrop, one might not feel confident about investing in stocks. Nevertheless, this must not stop equity investment. Instead, one should pick a stock that has the potential to bring solid returns. Keeping this in mind, we recommend stocks like Arch Resources (ARCH - Free Report) , Valero Energy (VLO - Free Report) , Apple Hospitality REIT (APLE - Free Report) , Matson (MATX - Free Report) and Covenant Logistics Group (CVLG - Free Report) , which bear low leverage and therefore can shield investors from incurring losses in times of crisis.
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.
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 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.
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 37 stocks that made it through the screen.
Arch Resources: It is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The company’s June 2022 sustainability report included a robust discussion on the company's significant and ongoing progress in its 10-year pivot toward global steel and metallurgical coal markets, which are expected to play an essential role in the build-out of a new, low-carbon economy.
ARCH delivered an earnings surprise of 10.71%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings implies a 210% improvement from the 2021 reported figure.
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 35.4% improvement year over year.
Apple Hospitality REIT: It is a real estate investment trust. Its portfolio consists of hotels, guest rooms and resorts. In June 2022, Apple Hospitality REIT announced the recipients of the company’s 2021 Apple Awards.
APLE carries a Zacks Rank #2 and delivered an earnings surprise of 16.93%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 26.9% improvement from the 2021 figure. 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 1 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 from the 2021 reported figure.
Covenant Logistics: It offers a portfolio of transportation and logistics services, through its subsidiaries. In May 2022, the company’s board of directors approved a new stock repurchase authorization of up to $75 million following the recent completion of the previously announced $30 million 10b5-1 repurchase plan.
CVLG currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 27.97%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings suggests a 10.7% improvement from the 2021 reported figure.
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