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Buy These 5 Low-Leverage Stocks as Rate Hike Fear Subsides
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Major U.S. stock indices ended in the red on Dec 4, with investors seeming to be cautious about the employment data that is due to be released on the coming Friday. Nevertheless, the market consensus is that the Federal Reserve will keep the nation’s interest rate unchanged in the upcoming meeting next week.
This might boost investors’ confidence in the stock market, leading them to choose stocks that have performed well in the recent past. However, considering the fact that the global market has been on edge lately, a prudent investor should always go for safe bet stocks like Arch Capital Goods (ACGL - Free Report) , Chubb Limited (CB - Free Report) , Viper Energy (VNOM - Free Report) , Teekay Tankers (TNK - Free Report) and Limbach (LMB - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.
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 conducted 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. It is desirable only as long as it successfully generates a higher rate of return compared with the interest rate. So, to avoid considerable losses in the portfolio, you 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. 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 behind 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.
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, we present our five picks out of the 17 stocks that made it through the screen.
Arch Capital Good: This company offers insurance, reinsurance and mortgage insurance across the world. On Oct 30, 2023, the company reported its third-quarter results. Its net premium written improved 23.1% year over year, while its underwriting income improved a solid 960%.
ACGL boasts a long-term earnings growth rate of 10%. It currently holds a Zacks Rank #2. The Zacks Consensus Estimate for 2023 sales suggests a 32.6% improvement from the 2022 reported figure.
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 reduce 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 from the 2022 reported figure.
Viper Energy: It is a variable distribution MLP and is a subsidiary of Diamondback Energy — an independent oil & gas exploration and production company. On Nov 6, 2023, the company reported its third-quarter results. Its average daily oil volume production improved 11.4% year over year in the third quarter.
VNOM currently carries a Zacks Rank #2. The company boasts a four-quarter average earnings surprise of 92.62%%. The Zacks Consensus Estimate for VNOM’s 2023 earnings indicates an improvement of 30.7% from the 2022 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.
Limbach: It engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems of buildings. On Nov 8, 2023, the company announced its third quarter results. Its quarterly revenues rose 4.4% year over year, while earnings per share improved 79.4%.
LMB currently sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2023 earnings suggests a 1.6% improvement from the 2022 reported figure. The stock boasts a long-term earnings growth rate of 12%.
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 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
Buy These 5 Low-Leverage Stocks as Rate Hike Fear Subsides
Major U.S. stock indices ended in the red on Dec 4, with investors seeming to be cautious about the employment data that is due to be released on the coming Friday. Nevertheless, the market consensus is that the Federal Reserve will keep the nation’s interest rate unchanged in the upcoming meeting next week.
This might boost investors’ confidence in the stock market, leading them to choose stocks that have performed well in the recent past. However, considering the fact that the global market has been on edge lately, a prudent investor should always go for safe bet stocks like Arch Capital Goods (ACGL - Free Report) , Chubb Limited (CB - Free Report) , Viper Energy (VNOM - Free Report) , Teekay Tankers (TNK - Free Report) and Limbach (LMB - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.
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 conducted 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. It is desirable only as long as it successfully generates a higher rate of return compared with the interest rate. So, to avoid considerable losses in the portfolio, you 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. 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 behind 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.
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, we present our five picks out of the 17 stocks that made it through the screen.
Arch Capital Good: This company offers insurance, reinsurance and mortgage insurance across the world. On Oct 30, 2023, the company reported its third-quarter results. Its net premium written improved 23.1% year over year, while its underwriting income improved a solid 960%.
ACGL boasts a long-term earnings growth rate of 10%. It currently holds a Zacks Rank #2. The Zacks Consensus Estimate for 2023 sales suggests a 32.6% improvement from the 2022 reported figure.
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 reduce 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 from the 2022 reported figure.
Viper Energy: It is a variable distribution MLP and is a subsidiary of Diamondback Energy — an independent oil & gas exploration and production company. On Nov 6, 2023, the company reported its third-quarter results. Its average daily oil volume production improved 11.4% year over year in the third quarter.
VNOM currently carries a Zacks Rank #2. The company boasts a four-quarter average earnings surprise of 92.62%%. The Zacks Consensus Estimate for VNOM’s 2023 earnings indicates an improvement of 30.7% from the 2022 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.
Limbach: It engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems of buildings. On Nov 8, 2023, the company announced its third quarter results. Its quarterly revenues rose 4.4% year over year, while earnings per share improved 79.4%.
LMB currently sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2023 earnings suggests a 1.6% improvement from the 2022 reported figure. The stock boasts a long-term earnings growth rate of 12%.
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 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.