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Bet on These 5 Low-Leverage Stocks as Price Hikes Ease
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A handful of major stock indices, including the S&P 500 and Nasdaq Composite, ended in the green on Nov 16, as inflation woes eased over the last few days. October’s producer price index slid 0.5%, marking its biggest monthly decline since April 2020. Meanwhile, the consumer price index was flat last month. Such impressive inflation data, along with stable interest rates kept by the U.S. Federal Reserve, seem to have bolstered investors’ confidence.
This might encourage investors to rush for some good growth and value stocks. However, historically, it has been observed that not all growth and value stocks have been successful in offering their promised returns during periods of crisis. Given the uncertainty in the global economy of late, it is natural for a prudent investor to choose safe stocks like Textron (TXT - Free Report) , Chubb Limited (CB - Free Report) , Costco Wholesale (COST - Free Report) , Teekay Tankers (TNK - Free Report) and Granite Construction (GVA - 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 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 21 stocks that made it through the screen.
Textron: This global multi-industry company manufactures aircraft, automotive engine components and industrial tools. On Nov 16, 2023, Textron announced that the delivery of the first five of the 10 Bell 505 helicopters to the Royal Jordanian Air Force had been made. This reflects the solid demand that TXT’s helicopters enjoy in the global military market.
TXT boasts a long-term earnings growth rate of 11.7%. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales suggests a 6.9% improvement year over year.
Chubb Limited: It is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer. On Nov 15, 2023, the company launched the Chubb Methane Resource Hub, a digital resource offering clients information and insights for measuring and mitigating methane emissions. This would help CB’s customers in reducing their GHG emissions.
CB currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for 2023 sales suggests a 10.6% improvement year over year.
Costco Wholesale: It is one of the largest warehouse club operators in the United States, selling high volumes of foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses. On Nov 1, 2023, Costco announced its October sales. The company reported net sales of $18.53 billion for the retail month of October, reflecting an increase of 4.5% from $17.73 billion last year.
COST currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.6%. The Zacks Consensus Estimate for COST’s fiscal 2024 sales indicates an improvement of 4.3% from the fiscal 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teekay Tankers: It is the largest operator of mid-sized tankers, including suezmax, aframax, and long-range two vessels. On Nov 2, 2023, Teekay Tankers announced its third-quarter 2023 results. Its revenues improved 2.3% year over year to $285.9 million.
TNK currently holds a Zacks Rank #2. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s sales suggests a 61.3% improvement from the 2022 reported figure.
Granite Construction: It is one of the United States’ largest infrastructure contractors and construction materials producers. On Oct 31, 2023, the company announced its third-quarter 2023 results. Its revenues improved 10.7% year over year, while earnings per share deteriorated 16.9%.
GVA currently sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2023 earnings suggests a 35.1% improvement from the 2022 reported figure. The stock boasts an earnings surprise of 19.86% in the last reported quarter.
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.
Image: Bigstock
Bet on These 5 Low-Leverage Stocks as Price Hikes Ease
A handful of major stock indices, including the S&P 500 and Nasdaq Composite, ended in the green on Nov 16, as inflation woes eased over the last few days. October’s producer price index slid 0.5%, marking its biggest monthly decline since April 2020. Meanwhile, the consumer price index was flat last month. Such impressive inflation data, along with stable interest rates kept by the U.S. Federal Reserve, seem to have bolstered investors’ confidence.
This might encourage investors to rush for some good growth and value stocks. However, historically, it has been observed that not all growth and value stocks have been successful in offering their promised returns during periods of crisis. Given the uncertainty in the global economy of late, it is natural for a prudent investor to choose safe stocks like Textron (TXT - Free Report) , Chubb Limited (CB - Free Report) , Costco Wholesale (COST - Free Report) , Teekay Tankers (TNK - Free Report) and Granite Construction (GVA - 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 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 21 stocks that made it through the screen.
Textron: This global multi-industry company manufactures aircraft, automotive engine components and industrial tools. On Nov 16, 2023, Textron announced that the delivery of the first five of the 10 Bell 505 helicopters to the Royal Jordanian Air Force had been made. This reflects the solid demand that TXT’s helicopters enjoy in the global military market.
TXT boasts a long-term earnings growth rate of 11.7%. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales suggests a 6.9% improvement year over year.
Chubb Limited: It is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer. On Nov 15, 2023, the company launched the Chubb Methane Resource Hub, a digital resource offering clients information and insights for measuring and mitigating methane emissions. This would help CB’s customers in reducing their GHG emissions.
CB currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for 2023 sales suggests a 10.6% improvement year over year.
Costco Wholesale: It is one of the largest warehouse club operators in the United States, selling high volumes of foods and general merchandise (including household products and appliances) at discounted prices through membership warehouses. On Nov 1, 2023, Costco announced its October sales. The company reported net sales of $18.53 billion for the retail month of October, reflecting an increase of 4.5% from $17.73 billion last year.
COST currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.6%. The Zacks Consensus Estimate for COST’s fiscal 2024 sales indicates an improvement of 4.3% from the fiscal 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teekay Tankers: It is the largest operator of mid-sized tankers, including suezmax, aframax, and long-range two vessels. On Nov 2, 2023, Teekay Tankers announced its third-quarter 2023 results. Its revenues improved 2.3% year over year to $285.9 million.
TNK currently holds a Zacks Rank #2. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s sales suggests a 61.3% improvement from the 2022 reported figure.
Granite Construction: It is one of the United States’ largest infrastructure contractors and construction materials producers. On Oct 31, 2023, the company announced its third-quarter 2023 results. Its revenues improved 10.7% year over year, while earnings per share deteriorated 16.9%.
GVA currently sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2023 earnings suggests a 35.1% improvement from the 2022 reported figure. The stock boasts an earnings surprise of 19.86% in the last reported quarter.
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.