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5 Low-Leverage Stocks to Buy as Market Woes Compound
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The majority of U.S. stock indices fell on Oct 13, reflecting investors’ concerns about the escalating Israel-Hamas conflict and the resultant oil price surge. The sharp fall witnessed in the October consumer sentiment index has compounded the stock market’s woes as households remain worried about inflation.
This might discourage one from investing in stocks right now. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Addus HomeCare (ADUS - Free Report) , Amalgamated Financial (AMAL - Free Report) , ALLETE Inc (ALE - Free Report) , Arcose (ACA - Free Report) and Limbach (LMB - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge 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.
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.
The equity market can be volatile 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 knocking on the doors, 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 23 stocks that made it through the screen.
Addus Homecare: The company is a comprehensive provider of a broad range of social and medical services in the home. On Aug 1, 2023, Addus HomeCare announced that it has completed the acquisition of the entities comprising Tennessee Quality Care, a provider of home health, hospice, and private duty nursing services.
Based in Franklin, TN, Tennessee Quality Care serves an average daily census of approximately 1,800 patients through 17 locations covering a service area of over 50 counties in the state. Addus funded the acquisition through a combination of cash on hand and the company’s revolving credit facility.
ADUS boasts a long-term earnings growth rate of 12.6%. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales suggests a 10.4% improvement year over year.
Amalgamated Financial: It provides commercial banking and trust services nationally and offers products and services to both commercial and retail customer. On Jul 27, 2023, the company reported its second-quarter 2023 results. Its earnings per share of 70 cents improved a solid 11.1% year over year.
AMAL currently carries a Zacks Rank #2. The company delivered an earnings surprise of 7.02% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 7.7% improvement year over year.
ALLETE: It is an energy company. On Aug 8, 2023, ALLETE reported its second-quarter 2023 results. ALE’s earnings of 90 cents per share reflect an improvement of 34.3% from the prior year quarter’s reported figure.
ALE currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.10%. The Zacks Consensus Estimate for ALE’s 2023 sales indicates an improvement of 23.8% from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arcosa: It is a manufacturer of infrastructure-related products and services and serves construction, energy and transportation markets. On Oct 3, 2023, Arcosa announced its second-quarter 2023 results. Its revenues declined 3% year over year to $584.8 million, while earnings per share declined 8%.
ACA currently carries a Zacks Rank #2. The company delivered an earnings surprise of 47.51% on average in the trailing four quarters. The Zacks Consensus Estimate for ACA’s sales suggests a 1.2% improvement from the 2022 reported figure.
Limbach: It provides building systems. The company engineers, constructs and services mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. On Aug 9, 2023, Limbach announced its second-quarter 2023 results. Its revenues increased 7.5% year over year, while gross profit improved a solid 33.7%.
LMB currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 12%. The Zacks Consensus Estimate for LMB’s 2023 sales suggests a 0.8% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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.
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5 Low-Leverage Stocks to Buy as Market Woes Compound
The majority of U.S. stock indices fell on Oct 13, reflecting investors’ concerns about the escalating Israel-Hamas conflict and the resultant oil price surge. The sharp fall witnessed in the October consumer sentiment index has compounded the stock market’s woes as households remain worried about inflation.
This might discourage one from investing in stocks right now. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Addus HomeCare (ADUS - Free Report) , Amalgamated Financial (AMAL - Free Report) , ALLETE Inc (ALE - Free Report) , Arcose (ACA - Free Report) and Limbach (LMB - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge 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.
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.
The equity market can be volatile 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 knocking on the doors, 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 23 stocks that made it through the screen.
Addus Homecare: The company is a comprehensive provider of a broad range of social and medical services in the home. On Aug 1, 2023, Addus HomeCare announced that it has completed the acquisition of the entities comprising Tennessee Quality Care, a provider of home health, hospice, and private duty nursing services.
Based in Franklin, TN, Tennessee Quality Care serves an average daily census of approximately 1,800 patients through 17 locations covering a service area of over 50 counties in the state. Addus funded the acquisition through a combination of cash on hand and the company’s revolving credit facility.
ADUS boasts a long-term earnings growth rate of 12.6%. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales suggests a 10.4% improvement year over year.
Amalgamated Financial: It provides commercial banking and trust services nationally and offers products and services to both commercial and retail customer. On Jul 27, 2023, the company reported its second-quarter 2023 results. Its earnings per share of 70 cents improved a solid 11.1% year over year.
AMAL currently carries a Zacks Rank #2. The company delivered an earnings surprise of 7.02% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 7.7% improvement year over year.
ALLETE: It is an energy company. On Aug 8, 2023, ALLETE reported its second-quarter 2023 results. ALE’s earnings of 90 cents per share reflect an improvement of 34.3% from the prior year quarter’s reported figure.
ALE currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.10%. The Zacks Consensus Estimate for ALE’s 2023 sales indicates an improvement of 23.8% from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arcosa: It is a manufacturer of infrastructure-related products and services and serves construction, energy and transportation markets. On Oct 3, 2023, Arcosa announced its second-quarter 2023 results. Its revenues declined 3% year over year to $584.8 million, while earnings per share declined 8%.
ACA currently carries a Zacks Rank #2. The company delivered an earnings surprise of 47.51% on average in the trailing four quarters. The Zacks Consensus Estimate for ACA’s sales suggests a 1.2% improvement from the 2022 reported figure.
Limbach: It provides building systems. The company engineers, constructs and services mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. On Aug 9, 2023, Limbach announced its second-quarter 2023 results. Its revenues increased 7.5% year over year, while gross profit improved a solid 33.7%.
LMB currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 12%. The Zacks Consensus Estimate for LMB’s 2023 sales suggests a 0.8% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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.