Wall Street ended last week on a disappointing note, with a tight labor market and inflation impacting investors’ confidence.
Such a situation might make equity investors further shaky. However, experts suggest that this is the right time to buy some stocks as their prices are low and they are thus affordable. Stocks like
Titan Machinery ( TITN Quick Quote TITN - Free Report) , Valero Energy ( VLO Quick Quote VLO - Free Report) , Chubb Ltd ( CB Quick Quote CB - Free Report) , Kite Realty Group Trust ( KRG Quick Quote KRG - Free Report) and EchoStar ( SATS Quick Quote SATS - Free Report) bear low leverage and therefore can shield investors from incurring losses.
Now, before selecting low leverage stocks, one must be aware of 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 behind us, 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 30 stocks that made it through the screen.
Titan Machinery: It represents a diversified mix of agricultural, construction, and consumer products dealerships. In August 2022, Titan Machinery announced its second-quarter 2022 results. The company posted a 31.5% year-over-year increase in its quarterly revenues.
TITN delivered an earnings surprise of 59.48%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 12.1% in the past 60 days.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In July 2022, the company reported its second-quarter 2022 results. Valero Energy reported net income worth $4.7 billion in second-quarter 2022, significantly up from $162 million posted in the second quarter of 2021.
VLO currently sports a Zacks Rank #1. The company delivered an earnings surprise of 33.54% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 54.1% in the past 60 days.
Chubb: It is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer, based on a market capitalization of $56.9 billion. In July 2022, the company released its second-quarter 2022 results. Its consolidated net premiums written were up 7.9%.
CB carries a Zacks Rank #2 and delivered an earnings surprise of 12.12%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 5.6% in the past 60 days. You can see
. the complete list of today’s Zacks #1 Rank stocks here Kite Realty Group: It is a full-service, vertically integrated real estate investment trust focused primarily on the development, construction, acquisition, ownership and operation of high-quality neighborhood and community shopping centers in selected growth markets in the United States. In August 2022, the company declared a year-over-year dividend hike of 22%.
Currently, KRG has a Zacks Rank of 2 and delivered an earnings surprise of 9.92%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has improved 2.2% over the past 60 days.
EchoStar: It is a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband Internet services for home and small office customers. In August 2022, EchoStar announced its second-quarter 2022 results. The company reported consolidated revenue worth $499.3 million, flat year over year.
SATS currently has a Zacks Rank #2. It delivered an earnings surprise of 15.63%, on average. The consensus estimate for 2022 earnings has improved 2.1% over the past 60 days.
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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