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5 Low-Leverage Stocks to Buy as Inflation Data Meets Expectation

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Most of the major U.S. stock indices ended the month of May on a high note, reflecting investors’ optimism after inflation data offered some relief.  Inflation in the United States, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, came in at 2.7% on a yearly basis in April, as reported by the U.S. Bureau of Economic Analysis on May 31. This was in line with the market expectations.

In such a situation, we recommend stocks like Vital Farms (VITL - Free Report) , Group Limited (TCOM - Free Report) , Atmos Energy (ATO - Free Report) , Strategic Education (STRA - Free Report) and Oscar Health (OSCR - 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 excessive 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. 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 season 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 factors above, 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 15 stocks that made it through the screen.

Vital Farms: The company offers a range of produced pasture-raised foods, including shell eggs, butter, hard-boiled eggs, ghee and liquid whole eggs. On May 9, 2024, Vital Farms released its first-quarter 2024 results. Its net revenues increased 24.1% year over year to a record $147.9 million, while its earnings per share improved 168.8% to 43 cents.

VITL boasts a four-quarter average earnings surprise of 102.10%. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for VITL’s 2024 sales suggests a solid 22.5% improvement from 2023’s reported figure. It is a travel service company. Its services consist of, Ctrip, Skyscanner and Qunar. The company's platform includes mobile apps, Internet websites and 24/7 customer service centers.  On May 5, the company announced its unaudited financial results for the first quarter of 2024. Its domestic hotel bookings increased by over 20% year over year, while outbound hotel bookings increased by more than 100% year.

TCOM currently holds a Zacks Rank #2. The company boasts a four-quarter average earnings surprise of 44.86%. The Zacks Consensus Estimate for TCOM’s 2024 sales suggests a 17.4% improvement from the year-ago reported quarter.

Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On May 8, Atmos Energy announced its second-quarter fiscal 2024 results. Its earnings per share came in at $4.93, higher than the year-ago quarter’s level of $4.40.

ATO currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7%. The Zacks Consensus Estimate for ATO’s fiscal 2024 sales implies an increase of 10.1% from fiscal 2023 sales. You can see the complete list of today’s Zacks #1 Rank stocks here.

Strategic Education: It provides a range of post-secondary education and other academic programs in the United States. On Apr 25, 2024, the company announced its first-quarter 2024 results. Its revenues increased 13.1% year over year to $290.3 million, while adjusted earnings per share improved a massive 362.5% to $1.11.

STRA currently sports a Zacks Rank #1. The company has a long-term earnings growth rate of 20.8%. The Zacks Consensus Estimate for STRA’s 2024 sales implies an improvement of 6.4% from the 2023 reported sales figure.  

Oscar Health: The company is a digital health insurance company. On May 7, 2024, the company reported its first-quarter 2024 results. Its total revenues increased 46% year over year, while its earnings of 62 cents per share improved from a loss of 18 cents incurred in the first quarter of 2023.

OSCR currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 37.1%. The Zacks Consensus Estimate for OSCR’s 2024 sales suggests a 42.9% improvement from the 2023 reported figure.

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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

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