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4 High-Interest Coverage Stocks Set to Shine After Fed's Rate Cut
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Key Takeaways
The Fed cut rates by 0.25 points, sparking optimism for growth and corporate earnings.
Stride, Ralph Lauren, Encompass Health and Progressive show strong interest coverage.
All four stocks combine solid VGM Scores with strong Zacks Ranks for added upside potential.
The U.S. stock market cheered the Federal Reserve’s move toward a more accommodative monetary policy. The central bank lowered its benchmark interest rate by a quarter percentage point to a 4-4.25% range, citing the need to boost growth while keeping inflation under control. Investors greeted the move, seeing it as the beginning of a potential easing cycle that could trigger renewed economic momentum and improve corporate earnings prospects.
Markets responded positively, with the Dow Jones Industrial Average climbing 124.10 points, or 0.27%, to finish at 46,142.42 yesterday. The S&P 500 added 31.61 points, or 0.48%, closing at 6,631.96, while the Nasdaq Composite outperformed, advancing 209.40 points, or 0.94%, to settle at 22,470.72.
With borrowing costs expected to decline, companies with robust interest coverage ratios stand to benefit. A higher ratio indicates that a firm generates sufficient earnings to comfortably meet its interest obligations. As rate cuts gradually filter through the economy, such companies not only benefit from cheaper financing but also demonstrate greater resilience against volatility.
Stride, Inc. (LRN - Free Report) , Ralph Lauren Corporation (RL - Free Report) , Encompass Health Corporation (EHC - Free Report) and The Progressive Corporation (PGR - Free Report) boast an impressive interest coverage ratio.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.
Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over time.
The Winning Strategy
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks with a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 12 stocks that qualified the screening:
Stride, a technology-based education company, sports a Zacks Rank #1 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 98.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stride’s current financial-year sales and EPS indicates growth of 11% and 5.9%, respectively, from the year-ago period. The stock has soared 65.7% in the past year.
Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, sports a Zacks Rank #1 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.5%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial-year sales and EPS calls for growth of 6% and 19.8%, respectively, from the year-ago period. The stock has advanced 69.4% in the past year.
Encompass Health Corporation, the largest owner and operator of inpatient rehabilitation hospitals in the United States, carries a Zacks Rank #2 and has a VGM Score of B. EHC has a trailing four-quarter earnings surprise of 14%, on average.
The Zacks Consensus Estimate for Encompass Health Corporation’s current financial-year sales and EPS implies growth of 10.2% and 18.3%, respectively, from the year-ago period. The stock has risen 35.3% in the past year.
The Progressive Corporation, which operates as an insurance company in the United States, carries a Zacks Rank #2 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.2%, on average.
The Zacks Consensus Estimate for The Progressive Corporation’s current financial-year sales and EPS suggests growth of 16.4% and 26.8%, respectively, from the year-ago period. The stock has declined 6.7% in the past year.
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
4 High-Interest Coverage Stocks Set to Shine After Fed's Rate Cut
Key Takeaways
The U.S. stock market cheered the Federal Reserve’s move toward a more accommodative monetary policy. The central bank lowered its benchmark interest rate by a quarter percentage point to a 4-4.25% range, citing the need to boost growth while keeping inflation under control. Investors greeted the move, seeing it as the beginning of a potential easing cycle that could trigger renewed economic momentum and improve corporate earnings prospects.
Markets responded positively, with the Dow Jones Industrial Average climbing 124.10 points, or 0.27%, to finish at 46,142.42 yesterday. The S&P 500 added 31.61 points, or 0.48%, closing at 6,631.96, while the Nasdaq Composite outperformed, advancing 209.40 points, or 0.94%, to settle at 22,470.72.
With borrowing costs expected to decline, companies with robust interest coverage ratios stand to benefit. A higher ratio indicates that a firm generates sufficient earnings to comfortably meet its interest obligations. As rate cuts gradually filter through the economy, such companies not only benefit from cheaper financing but also demonstrate greater resilience against volatility.
Stride, Inc. (LRN - Free Report) , Ralph Lauren Corporation (RL - Free Report) , Encompass Health Corporation (EHC - Free Report) and The Progressive Corporation (PGR - Free Report) boast an impressive interest coverage ratio.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.
Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over time.
The Winning Strategy
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks with a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are four of the 12 stocks that qualified the screening:
Stride, a technology-based education company, sports a Zacks Rank #1 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 98.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Stride’s current financial-year sales and EPS indicates growth of 11% and 5.9%, respectively, from the year-ago period. The stock has soared 65.7% in the past year.
Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, sports a Zacks Rank #1 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.5%, on average.
The Zacks Consensus Estimate for Ralph Lauren’s current financial-year sales and EPS calls for growth of 6% and 19.8%, respectively, from the year-ago period. The stock has advanced 69.4% in the past year.
Encompass Health Corporation, the largest owner and operator of inpatient rehabilitation hospitals in the United States, carries a Zacks Rank #2 and has a VGM Score of B. EHC has a trailing four-quarter earnings surprise of 14%, on average.
The Zacks Consensus Estimate for Encompass Health Corporation’s current financial-year sales and EPS implies growth of 10.2% and 18.3%, respectively, from the year-ago period. The stock has risen 35.3% in the past year.
The Progressive Corporation, which operates as an insurance company in the United States, carries a Zacks Rank #2 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.2%, on average.
The Zacks Consensus Estimate for The Progressive Corporation’s current financial-year sales and EPS suggests growth of 16.4% and 26.8%, respectively, from the year-ago period. The stock has declined 6.7% in the past year.
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 is available at: https://www.zacks.com/performance.