A near-term boost is expected in U.S. stocks, with regulators revealing a strategy to backstop all depositors in failed Silicon Valley Bank (SVB) and offer additional funding for other banks. Consequently, U.S. stock futures jumped on Mar 13 morning before markets opened.
Although this is encouraging news post the SVB’s collapse last week, upcoming inflation data might continue to keep investors on the edge of uncertainty.
At times like these people tend to go for stocks that have a high growth score and have already excelled in the prior quarters. However, a prudent investor is aware of the fact that in such times when a question has been raised about banks’ profitability, one should go for stocks that don’t owe much to their lenders. In other words, one should invest in stocks like
Axos Financial ( AX Quick Quote AX - Free Report) , Alaska Air Group ( ALK Quick Quote ALK - Free Report) , RenaissanceRe ( RNR Quick Quote RNR - Free Report) , Skyline ( SKY Quick Quote SKY - Free Report) and MDU Resources ( MDU Quick Quote MDU - 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 fourth-quarter earnings cycle almost in its last lap, 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 with a negative or a zero debt-to-equity ratio, here we present five out of 19 picks that made it through screening.
Axos Financial: It is the holding company for BofI Federal Bank, which provides financing for single and multifamily residential properties, small-to-medium size businesses in target sectors and selected specialty finance receivables. On Mar 12, 2023, the company provided a mid-quarter business update for its fiscal third quarter ending Mar 31, 2023. Per this update, AX’s commercial and consumer average deposits have grown by 12% year over year to $13.7 billion.
AX delivered an earnings surprise of 8.12%, on average, in the trailing four quarters. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2023 earnings implies a 15.1% improvement from the fiscal 2022 reported figure.
Alaska Air Group: This airline company, together with its partner regional carriers, serves more than 120 cities across North America. In January 2023, Alaska Air announced its fourth-quarter 2022 results. The company reported operating revenues of $2,479 million in the fourth quarter, up 31% year over year.
ALK currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2023 earnings suggests a 32.6% improvement from the 2022 reported figure. It delivered an earnings surprise of 8.98%, on average, in the trailing four quarters.
RenaissanceRe: It primarily provides property-catastrophe reinsurance to insurers and reinsurers globally on the basis of excess loss. On Feb 8, 2023, the company announced that its board of directors increased its quarterly dividend to 38 cents per share from 37 cents per share. RNR currently sports a Zacks Rank #1. It delivered an earnings surprise of 11.40% in the last reported quarter. The Zacks Consensus Estimate for 2023 earnings indicates a 220.3% improvement from the 2022 reported figure. You can see . the complete list of today’s Zacks #1 Rank stocks here Skyline: It designs, produces and distributes manufactured housing and recreational vehicles. On Feb 6, 2023, Skyline announced its third-quarter fiscal 2023 results. Its net sales for third-quarter fiscal 2023 increased 8.9% from the prior-year period to $582.3 million.
SKY currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 43.18%, on average. The Zacks Consensus Estimate for fiscal 2023 earnings suggests a 61.2% improvement from the 2022 reported figure.
MDU Resources: It is a utility natural gas distribution company, which provides value-added natural resource products and related services that are essential for energy transportation, regulated energy delivery and construction materials and services business. On Feb 9, 2023, MDU Resources reported its fourth-quarter and full-year 2022 results. Impressively, at the end of 2022, the company had an all-time high combined backlog at its construction businesses of more than $3 billion. Such a solid backlog is indicative of solid revenue growth for MDU in the near future.
MDU currently carries a Zacks Rank #2. It delivered an earnings surprise of 19.61% in the last reported quarter. The Zacks Consensus Estimate for 2023 earnings suggests a 13.9% improvement from the 2022 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.