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5 Low Leverage Stocks to Buy as U.S. Consumer Credit Falls
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Major U.S. stock indices ended in green on Feb 7, with the S&P 500 and the Dow Jones industrial average each making an upward move. This was most likely driven by investors’ optimism surrounding the Federal Reserve’s latest report, which depicted a 5.7% annual decline in U.S. consumer credit data.
Against this backdrop, stock market players might be in the mood for some good investments. However, since the share market has lately been on edge, we recommend stocks like Applied Industrial Technologies (AIT - Free Report) , Arch Resources (ARCH - Free Report) , The Hartford Financial Services Group (HIG - Free Report) , Photronics (PLAB - Free Report) and Steelcase (SCS - 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 that 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.
As the fourth-quarter earnings cycle has already started, 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 nine stocks that made it through the screen.
Applied Industrial Technologies: It is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. On Jan 25, 2024, the company reported its fiscal 2024 second-quarter results. Its net sales for the fiscal second quarter increased 1.6% year over year, while adjusted earnings per share went up 9.3%.
AIT delivered a four-quarter average earnings surprise of 10.42%. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal third-quarter 2024 earnings suggests a 2.9% improvement from the year-ago quarter’s reported figure.
Arch Resources: The company is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. On Jan 17, 2024, Arch Resources announced that its Leer mine had achieved Level A verification for all protocols comprising the Towards Sustainable Mining (TSM) initiative. Leer is the first mine of any type to achieve and verify this performance level through TSM's new subscription program, which allows any mine anywhere in the world to implement this globally recognized sustainability initiative for the mining industry.
ARCH currently sports a Zacks Rank #1. The company delivered an average earnings surprise of 24.45% in the trailing four quarters. The Zacks Consensus Estimate for fourth-quarter 2023 earnings has improved 32.7% over the past 60 days.
Hartford Financial Services: It is one of the major multi-line insurance and investment companies in the country, providing investment products, group life and group disability insurance, property and casualty (P&C) insurance and mutual funds in the United States. On Feb 1, 2024, the company announced its fourth-quarter and full-year 2023 results. Its P&C written premiums rose 10% year over year in the fourth quarter.
HIG currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7%. The Zacks Consensus Estimate for HIG’s first-quarter 2024 sales indicates an improvement of 10.8% from the first-quarter 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Photronics: It is a leading worldwide manufacturer of photomasks, which are high-precision quartz plates that contain microscopic images of electronic circuits. On Dec 13, 2023, Photronics reported financial results for the full year and fourth quarter of fiscal 2023. Its fourth-quarter revenues improved a solid 8% year over year, while adjusted net income surged 22.9%.
PLAB currently sports a Zacks Rank #1. The company delivered an average four-quarter earnings surprise of 8.51%. The Zacks Consensus Estimate for PLAB’s fiscal 2024 earnings suggests a 22.5% improvement from the fiscal 2023 reported figure.
Steelcase: It is a designer and manufacturer of products used to create high-performance work environments. On Dec 19, 2023, Steelcase reported third quarter 2023 results. Its orders (adjusted for the impact of divestitures and currency translation effects) grew 15% year over year in the third quarter.
SCS currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for SCS’ fourth-quarter 2023 earnings suggests a 10.5% improvement from the fourth-quarter 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 U.S. Consumer Credit Falls
Major U.S. stock indices ended in green on Feb 7, with the S&P 500 and the Dow Jones industrial average each making an upward move. This was most likely driven by investors’ optimism surrounding the Federal Reserve’s latest report, which depicted a 5.7% annual decline in U.S. consumer credit data.
Against this backdrop, stock market players might be in the mood for some good investments. However, since the share market has lately been on edge, we recommend stocks like Applied Industrial Technologies (AIT - Free Report) , Arch Resources (ARCH - Free Report) , The Hartford Financial Services Group (HIG - Free Report) , Photronics (PLAB - Free Report) and Steelcase (SCS - 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 that 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.
As the fourth-quarter earnings cycle has already started, 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 nine stocks that made it through the screen.
Applied Industrial Technologies: It is a distributor of value-added industrial products, including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. On Jan 25, 2024, the company reported its fiscal 2024 second-quarter results. Its net sales for the fiscal second quarter increased 1.6% year over year, while adjusted earnings per share went up 9.3%.
AIT delivered a four-quarter average earnings surprise of 10.42%. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal third-quarter 2024 earnings suggests a 2.9% improvement from the year-ago quarter’s reported figure.
Arch Resources: The company is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. On Jan 17, 2024, Arch Resources announced that its Leer mine had achieved Level A verification for all protocols comprising the Towards Sustainable Mining (TSM) initiative. Leer is the first mine of any type to achieve and verify this performance level through TSM's new subscription program, which allows any mine anywhere in the world to implement this globally recognized sustainability initiative for the mining industry.
ARCH currently sports a Zacks Rank #1. The company delivered an average earnings surprise of 24.45% in the trailing four quarters. The Zacks Consensus Estimate for fourth-quarter 2023 earnings has improved 32.7% over the past 60 days.
Hartford Financial Services: It is one of the major multi-line insurance and investment companies in the country, providing investment products, group life and group disability insurance, property and casualty (P&C) insurance and mutual funds in the United States. On Feb 1, 2024, the company announced its fourth-quarter and full-year 2023 results. Its P&C written premiums rose 10% year over year in the fourth quarter.
HIG currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7%. The Zacks Consensus Estimate for HIG’s first-quarter 2024 sales indicates an improvement of 10.8% from the first-quarter 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Photronics: It is a leading worldwide manufacturer of photomasks, which are high-precision quartz plates that contain microscopic images of electronic circuits. On Dec 13, 2023, Photronics reported financial results for the full year and fourth quarter of fiscal 2023. Its fourth-quarter revenues improved a solid 8% year over year, while adjusted net income surged 22.9%.
PLAB currently sports a Zacks Rank #1. The company delivered an average four-quarter earnings surprise of 8.51%. The Zacks Consensus Estimate for PLAB’s fiscal 2024 earnings suggests a 22.5% improvement from the fiscal 2023 reported figure.
Steelcase: It is a designer and manufacturer of products used to create high-performance work environments. On Dec 19, 2023, Steelcase reported third quarter 2023 results. Its orders (adjusted for the impact of divestitures and currency translation effects) grew 15% year over year in the third quarter.
SCS currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 10%. The Zacks Consensus Estimate for SCS’ fourth-quarter 2023 earnings suggests a 10.5% improvement from the fourth-quarter 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.