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5 Low-Leverage Picks to Capitalize on the AI-Led Optimism
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U.S. stocks ended on a mixed note on May 30, reflecting investors’ concerns about the latest debt ceiling deal. President Joe Biden has urged Congress to pass a deal to raise the government's borrowing limit. On the brighter side, artificial intelligence stocks’ gains in recent times, mostly driven by Nvidia's powerful sales guidance, are likely to have kept the U.S. equity market buoyant.
Against this backdrop, a prudent investor is likely to look at stocks that are less burdened with debt instead of focusing on only their historical growth trend. To this end, we recommend stocks like Atmos Energy (ATO - Free Report) , The TJX Companies (TJX - Free Report) , Linde PLC (LIN - Free Report) , Terex Corp (TEX - Free Report) and Kinsale CapitalGroup (KNSL - Free Report) , which bear low leverage. These can therefore 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 first-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.
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 six stocks that made it through the screen.
Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On May 3, the company released its second-quarter fiscal 2023 results. Its earnings per share were $2.48, compared with $2.37 in the year-ago quarter.
ATO delivered an earnings surprise of 4.92%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2023 earnings implies a 25.7% improvement from the fiscal 2022 reported figure.
TJX Companies: It is a leading off-price retailer of apparel and home fashions in the United States and worldwide. On May 17, 2023, the company announced its first-quarter fiscal 2024 results. Its net sales for the first quarter of fiscal 2024 were $11.8 billion, an increase of 3% from the first quarter of fiscal 2023.
TJX currently has a Zacks Rank #2. The company delivered an earnings surprise of 4.38% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 6.4% improvement year over year.
Linde: It is a leading producer of industrial gases that are being utilized in various industries like chemicals & refining, food & beverage, electronics, healthcare, manufacturing and primary metals. On Apr 27, the company reported its first-quarter 2023 results. Linde's sales for the first quarter were $8,193 million, reflecting a year-over-year improvement of 3%, excluding negative currency impact.
LIN carries a Zacks Rank #2 and has a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for 2023 sales indicates a 2.6% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Terex: It is a global manufacturer of aerial work platforms, materials processing machinery and cranes. On May 1, the company announced its first-quarter 2023 results. Its net sales of $1.2 billion increased 23.3% from the first quarter of 2022, primarily driven by higher volumes and demand for its products and improved price realization necessary to mitigate rising costs across all segments.
TEX currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 27.06%, on average. The Zacks Consensus Estimate for 2023 sales suggests an 11.7% improvement from the 2022 reported figure.
Kinsale Capital Group: It offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. On Apr 27, the company reported its first-quarter 2023 results. Its net operating earnings of $56.8 million increased 50.6% from the first quarter of 2022.
KNSL currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 14.77%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 36.4% improvement from the 2022 reported figure.
Get the remaining stock 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 Picks to Capitalize on the AI-Led Optimism
U.S. stocks ended on a mixed note on May 30, reflecting investors’ concerns about the latest debt ceiling deal. President Joe Biden has urged Congress to pass a deal to raise the government's borrowing limit. On the brighter side, artificial intelligence stocks’ gains in recent times, mostly driven by Nvidia's powerful sales guidance, are likely to have kept the U.S. equity market buoyant.
Against this backdrop, a prudent investor is likely to look at stocks that are less burdened with debt instead of focusing on only their historical growth trend. To this end, we recommend stocks like Atmos Energy (ATO - Free Report) , The TJX Companies (TJX - Free Report) , Linde PLC (LIN - Free Report) , Terex Corp (TEX - Free Report) and Kinsale Capital Group (KNSL - Free Report) , which bear low leverage. These can therefore 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 first-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.
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 six stocks that made it through the screen.
Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On May 3, the company released its second-quarter fiscal 2023 results. Its earnings per share were $2.48, compared with $2.37 in the year-ago quarter.
ATO delivered an earnings surprise of 4.92%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2023 earnings implies a 25.7% improvement from the fiscal 2022 reported figure.
TJX Companies: It is a leading off-price retailer of apparel and home fashions in the United States and worldwide. On May 17, 2023, the company announced its first-quarter fiscal 2024 results. Its net sales for the first quarter of fiscal 2024 were $11.8 billion, an increase of 3% from the first quarter of fiscal 2023.
TJX currently has a Zacks Rank #2. The company delivered an earnings surprise of 4.38% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 6.4% improvement year over year.
Linde: It is a leading producer of industrial gases that are being utilized in various industries like chemicals & refining, food & beverage, electronics, healthcare, manufacturing and primary metals. On Apr 27, the company reported its first-quarter 2023 results. Linde's sales for the first quarter were $8,193 million, reflecting a year-over-year improvement of 3%, excluding negative currency impact.
LIN carries a Zacks Rank #2 and has a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for 2023 sales indicates a 2.6% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Terex: It is a global manufacturer of aerial work platforms, materials processing machinery and cranes. On May 1, the company announced its first-quarter 2023 results. Its net sales of $1.2 billion increased 23.3% from the first quarter of 2022, primarily driven by higher volumes and demand for its products and improved price realization necessary to mitigate rising costs across all segments.
TEX currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 27.06%, on average. The Zacks Consensus Estimate for 2023 sales suggests an 11.7% improvement from the 2022 reported figure.
Kinsale Capital Group: It offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. On Apr 27, the company reported its first-quarter 2023 results. Its net operating earnings of $56.8 million increased 50.6% from the first quarter of 2022.
KNSL currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 14.77%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 36.4% improvement from the 2022 reported figure.
Get the remaining stock 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.