U.S. stocks have witnessed moderate improvement lately, with investors encouraged by positive earnings news of technology giants as well as oil giants last week.
Against this backdrop, an investor might feel encouraged to buy some stocks. However, before investing blindly on stocks that are offering high returns, one should be aware whether these returns are sustainable. To this end, we recommend stocks like
Arch Resources ( ARCH Quick Quote ARCH - Free Report) , Quanex Building Products ( NX Quick Quote NX - Free Report) , Pioneer Natural Resources ( PXD Quick Quote PXD - Free Report) , Matson ( MATX Quick Quote MATX - Free Report) and Suncor Energy ( SU Quick Quote SU - 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.
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 going on, 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 38 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. In July 2022, the company released its second-quarter 2022 results. Notably, the company repaid $135.8 million of its outstanding debt during the second quarter, reducing its total outstanding debt to just $187 million.
ARCH delivered an earnings surprise of 6.35%, 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.
Quanex Building Products: It designs and produces energy-efficient fenestration products in addition to kitchen and bath cabinet components. In June 2022, the company posted its second-quarter results. The company reported Q2 net sales of $322.9 million, representing growth of 19.4% year over year.
NX currently sports a Zacks Rank #1. The company delivered an earnings surprise of 30.20% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 34.3% improvement year over year.
Pioneer Natural Resources: It is an explorer and producer of oil, natural gas and natural gas liquid. In July 2022, Pioneer Natural Resources published its 2022 Sustainability report, which included the company’s plans to end routine flaring by 2025, five years earlier than PXD’s previous 2030 target. This commitment is in accordance with the World Bank’s standards and demonstrates Pioneer’s focus on environmental stewardship. PXD carries a Zacks Rank #2 and delivered an earnings surprise of 5.72%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 150.8% 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 July 2022, it announced preliminary second-quarter 2022 results, which reflected higher year-over-year operating income in both Ocean Transportation and Logistics.
Currently, MATX has a Zacks Rank of 2. It delivered an earnings surprise of 2.11%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings implies a 39% improvement from the 2021 reported figure.
Suncor Energy: It is Canada's premier integrated energy company. The company's operations include oil sands development and upgrade, 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, which reflected the company’s actions on sustainable energy development, emphasizing the progress made to accelerate GHG reductions to reach net-zero by 2050.
SU currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 3.58%, on average. The Zacks Consensus Estimate for fiscal 2022 earnings suggests a 206.4% improvement from the 2021 reported figure.
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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