Wall Street stocks have started to gain since the beginning of this week, as opposed to last week’s dismal performance. Notably market sentiment improved recently as U.S. authorities seem to be considering expanding an emergency lending program for banks (stated by Bloomberg News).
This should encourage investors to spend in stock market. Considering the fact that overall market situation is still volatile to some extent, one should progress with caution. So, we recommend stocks like
Marcus Corp ( MCS Quick Quote MCS - Free Report) , Skyline Corp. ( SKY Quick Quote SKY - Free Report) , Alaska Air Group ( ALK Quick Quote ALK - Free Report) , Preferred Bank ( PFBC Quick Quote PFBC - Free Report) and ICF International ( ICFI Quick Quote ICFI - 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 first-quarter earnings cycle ahead of 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 12 stocks that made it through the screen.
Marcus Corp.: It engages in the lodging and entertainment industries. On Mar 2, 2023, the company reported its fourth-quarter and full-year fiscal 2022 results. Marcus’ total revenues for the fiscal fourth quarter were $162.9 million, reflecting a 3.6% decrease from the fourth quarter of fiscal 2021.
MCS delivered an earnings surprise of 64.15%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2023 sales implies a 10.9% improvement from the fiscal 2022 reported figure.
Skyline: It designs, produces and distributes manufactured housing and recreational vehicles. On Feb 6, 2023, Skyline announced its third-quarter fiscal 2023 results. The stock’s net sales for the third quarter fiscal 2023 increased 8.9% from the prior-year period to $582.3 million.
SKY currently carries a Zacks Rank #2. The company delivered an earnings surprise of 43.18% in the last reported quarter. The Zacks Consensus Estimate for fiscal 2023 sales suggests a 19% improvement year over year.
Alaska Air: It is an airline company that together with its partner regional carriers serves more than 120 cities across North America. On Mar 23, 2023, Alaska Airlines announced an agreement with Shell Aviation to expand the sustainable aviation fuel (SAF) market beyond a standard fuel supply agreement. Shell Aviation will also supply up to 10 million gallons of neat SAF to Alaska Airlines at their hub in Los Angeles. ALK carries a Zacks Rank #2 and delivered an earnings surprise of 8.98%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales indicates a 9.1% improvement from the 2022 figure. You can see . the complete list of today’s Zacks #1 Rank stocks here Preferred Bank: It is one of the largest independent commercial banks in California focusing on the Chinese-American market. On Mar 10, 2023, the company revealed its updated financial data. Its total deposits have grown to $5.622 billion from $5.557 billion as of Mar 9, 2023.
PFBC currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 6.67%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 18.1% improvement from the 2022 reported figure.
ICF International: It is a provider of professional services and technology-based solutions to government and commercial clients. On Feb 28, 2023, the company reported its fourth-quarter and full-year 2022 results. Its total revenues in fourth-quarter 2022 increased 22.6% to $475.6 million from the fourth quarter of 2021.
ICFI currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 9.21%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 10.6% 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