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5 Low Leverage Stocks to Buy Amid an Upbeat Market
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U.S. stocks rallied on Oct 25 as hopes rose that the Federal Reserve might ease off plans for interest rate hikes. Britain’s new prime minister selection is also likely to have boosted investors’ confidence.
Against this backdrop, an investor might feel encouraged to buy some stocks. However, before investing blindly in stocks that are offering high returns, one should be aware whether these returns are sustainable. To this end, we recommend stocks like Equinor (EQNR - Free Report) , PBF Energy (PBF - Free Report) , Amalgamated Financial (AMAL - Free Report) , Warrior Met Coal (HCC - Free Report) and Valero Energy (VLO - 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 third-quarter earnings cycle starting, 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 24 stocks that made it through the screen.
Equinor: It is one of the premier integrated energy companies in the world, with operations spreading across 30 countries. In October 2022, the company announced that the serious incident development in Equinor improved in the third quarter of 2022, compared to its second-quarter reporting. No incidents with major accident potential have been recorded in the third quarter.
EQNR delivered an earnings surprise of 7.33%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings implies a 139.3% improvement from the 2021 reported figure.
PBF Energy: It is a leading refiner of crude. In July 2022, the company posted its second-quarter 2022 results, which reflected the impact of tight global supply and higher post-pandemic demand. During the second quarter of 2022, the company invested approximately $52 million to continue and incubate the project with the goal of being in production in the first half of 2023.
PBF currently carries a Zacks Rank #2. The company delivered an earnings surprise of 77.97% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 954.4% improvement year over year.
Amalgamated Financial: It provides commercial banking and trust services nationally and offers products and services to both commercial and retail customers. In August 2022, the company announced a $15 million loan to Inclusive Prosperity Capital, Inc., a clean energy finance 501(c)3 platform, making new capital available to fund climate initiatives benefiting underserved market segments and communities.
AMAL sports a Zacks Rank #1 and delivered an earnings surprise of 22.60%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 44.2% improvement from the 2021 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Warrior Met Coal: It is a producer and exporter of premium metallurgical coal. In August 2022, the company announced its second-quarter results. Warrior Met Coal produced 1.7 million short tons of met coal in the second quarter of 2022 compared with 1.2 million short tons in the second quarter of 2021.
Currently, HCC has a Zacks Rank of 2. It delivered an earnings surprise of 44.02%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings implies a 311.3% improvement from the 2021 reported figure.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In October, Valero Energy reported its third-quarter results. Valero ended the third quarter of 2022 with $9.6 billion of total debt, $1.9 billion of finance lease obligations and $4.0 billion of cash and cash equivalents,
VLO currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 33.54%, on average. The Zacks Consensus Estimate for 2022 earnings suggests an 850.2% 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 an Upbeat Market
U.S. stocks rallied on Oct 25 as hopes rose that the Federal Reserve might ease off plans for interest rate hikes. Britain’s new prime minister selection is also likely to have boosted investors’ confidence.
Against this backdrop, an investor might feel encouraged to buy some stocks. However, before investing blindly in stocks that are offering high returns, one should be aware whether these returns are sustainable. To this end, we recommend stocks like Equinor (EQNR - Free Report) , PBF Energy (PBF - Free Report) , Amalgamated Financial (AMAL - Free Report) , Warrior Met Coal (HCC - Free Report) and Valero Energy (VLO - 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 third-quarter earnings cycle starting, 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 24 stocks that made it through the screen.
Equinor: It is one of the premier integrated energy companies in the world, with operations spreading across 30 countries. In October 2022, the company announced that the serious incident development in Equinor improved in the third quarter of 2022, compared to its second-quarter reporting. No incidents with major accident potential have been recorded in the third quarter.
EQNR delivered an earnings surprise of 7.33%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings implies a 139.3% improvement from the 2021 reported figure.
PBF Energy: It is a leading refiner of crude. In July 2022, the company posted its second-quarter 2022 results, which reflected the impact of tight global supply and higher post-pandemic demand. During the second quarter of 2022, the company invested approximately $52 million to continue and incubate the project with the goal of being in production in the first half of 2023.
PBF currently carries a Zacks Rank #2. The company delivered an earnings surprise of 77.97% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 954.4% improvement year over year.
Amalgamated Financial: It provides commercial banking and trust services nationally and offers products and services to both commercial and retail customers. In August 2022, the company announced a $15 million loan to Inclusive Prosperity Capital, Inc., a clean energy finance 501(c)3 platform, making new capital available to fund climate initiatives benefiting underserved market segments and communities.
AMAL sports a Zacks Rank #1 and delivered an earnings surprise of 22.60%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 44.2% improvement from the 2021 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Warrior Met Coal: It is a producer and exporter of premium metallurgical coal. In August 2022, the company announced its second-quarter results. Warrior Met Coal produced 1.7 million short tons of met coal in the second quarter of 2022 compared with 1.2 million short tons in the second quarter of 2021.
Currently, HCC has a Zacks Rank of 2. It delivered an earnings surprise of 44.02%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings implies a 311.3% improvement from the 2021 reported figure.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In October, Valero Energy reported its third-quarter results. Valero ended the third quarter of 2022 with $9.6 billion of total debt, $1.9 billion of finance lease obligations and $4.0 billion of cash and cash equivalents,
VLO currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 33.54%, on average. The Zacks Consensus Estimate for 2022 earnings suggests an 850.2% 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.