Wall Street ended the first week of 2019 on an encouraging note, bouncing back from its turbulent start to the year, after stellar economic data point eased fears of a looming recession. In particular, the Federal Reserve chairman Jerome Powell recently announced that the overall global economy looks promising amid choppy market, while on the other hand, the Labor Department has released increased U.S. non-farm payrolls data — the biggest jump since February.
Both these news have infused enough confidence among investors about the U.S. stock market’s growth potential, as reflected in the suspension of the sell-off that Wall Street witnessed at the very onset of 2019. Notably, these developments are now anticipated to boost the stock market.
Nevertheless, one should remember that nothing is eternal and uncertainty can hit the global equity market anytime, without any prior notice. And if it does, an investor would want to take the right precautions for such periods of crisis.
To this end, it is imperative to mention that since debt-ridden companies are more vulnerable at times of volatility, it is better to avoid those for achieving optimal returns.
Of course, entirely avoiding companies with debt loads is virtually impossible as debt financing is an inherent feature of corporate financing. Still eliminating the ones bearing exorbitant debt loads might be a wise idea, since the more the company is leveraged, the more it is prone to get hit at times of a financial crunch.
And here comes the importance of leverage ratios, which are used by analysts to ensure that no investor chooses corporations with a high debt burden. Debt-to-equity ratio is one such measure, perhaps the most popular one, to evaluate a company’s creditworthiness for potential equity investments.
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 company with a lower debt-to-equity ratio indicates improved solvency for a company.
In general, investors target companies with solid earnings growth projections. But, in the uncertain world of investment, markets can trip anytime, particularly affecting companies with a higher degree of financial leverage. Therefore, blindly investing in stocks displaying solid earnings growth without considering their debt level is not a wise move.
The Winning Strategy
Considering the aforementioned factors, it is wise to choose stocks with a low debt-to-equity ratio to ensure safe returns.
However, an investment strategy based solely on 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 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 23 stocks that made it through the screen.
Helmerich & Payne, Inc. (HP - Free Report) : It is a contract drilling company engaged primarily in the drilling of oil and gas wells for exploration and production companies. The company generated a positive earnings surprise of 5.56% in the last reported quarter and currently carries a Zacks Rank #2.
Manulife Financial Corp. (MFC - Free Report) : It is one of the three dominant life insurers within the domestic Canadian market. The company currently holds a Zacks Rank of 2 and delivered average positive earnings surprise of 6.03% over the trailing four quarters.
HEICO Corporation (HEI - Free Report) : It is one of the world’s leading manufacturers of Federal Aviation Administration (“FAA”)-approved jet engine and aircraft component replacement parts. The company’s estimated long-term earnings growth rate is pegged at 12.10% and carries a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Amedisys, Inc. (AMED - Free Report) : It provides home health and hospice services throughout the United States to the growing chronic, co-morbid, and aging American population. Currently, the company carries a Zacks Rank #2. It came up with average positive earnings surprise of 16.55% in the preceding four quarters.
Titan Machinery Inc. (TITN - Free Report) : The company owns and operates a network of full-service agriculture and construction equipment dealerships in the United States and Europe. It currently flaunts a Zacks Rank #1 and delivered average positive earnings surprise of 68.67% in the last four quarters.
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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: https://www.zacks.com/performance.