U.S. stocks slipped on Jul 27, following the U.S. Federal Reserve’s 11th consecutive rate hike that was quite successful in overshadowing the news of stronger-than-expected U.S. economic growth data.
Considering the current situation, an investor might not be encouraged to invest in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Humana HUM, Terex Corp TEX, Apollo Commercial Real Estate Finance ARI, Atmos Energy ATO and Teekay Tankers TNK, which bear low leverage. These picks can shield investors from incurring 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, 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 and the debt-to-equity ratio is one of the most common ratios.
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 second-quarter earnings cycle knocking on our doors, 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 14 stocks that made it through the screen.
Humana: It is one of the largest health care plan providers in the United States, which offers health insurance benefits under Health Maintenance Organization, Private Fee-For-Service and Preferred Provider Organization plans. On Jul 21, Humana reported its second-quarter 2023 results. Its net revenues increased 8% year over year, while adjusted operating profit improved a solid 20%.
HUM delivered an earnings surprise of 8.87%, on average, in the trailing four quarters. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales implies a 10% improvement from the 2022 reported figure.
Terex: It is a global manufacturer of aerial work platforms, materials processing machinery and cranes. On Jul 11, 2023, the company’s board of directors declared a quarterly dividend increase of 13% to 17 cents per share. This marked the second dividend hike this year following a 15% increase in February.
TEX currently has a Zacks Rank #2. The company delivered an earnings surprise of 27.06% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests an 11.7% improvement year over year.
Apollo Commercial: It is focused on investing in, acquiring and managing senior performing commercial real estate mortgage loans, commercial mortgage-backed securities, commercial real estate corporate debt and loans, and other real estate debt investments. On Apr 23, 2023, the company announced its first-quarter 2023 results. Its distributable earnings and distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt per share of common stock were 48 cents and 51 cents, respectively.
ARI currently carries a Zacks Rank #2. The company delivered an earnings surprise of 4.30% on average in the trailing four quarters. The Zacks Consensus Estimate for ARI’s 2023 sales indicates a 17.3% improvement from the 2022 reported figure.
Atmos Energy: It is engaged in the regulated natural gas distribution and storage business. The company serves nearly 3.4 million customers in more than 1,400 communities in eight U.S. states. On May 3, 2023, the company reported its second-quarter fiscal 2023 results. Its earnings of $2.48 per share improved 4.6% from the year-ago quarter’s earnings, while revenues declined 6.6%.
ATO currently carries a Zacks Rank #2. The company delivered an earnings surprise of 4.92% on average in the trailing four quarters. The Zacks Consensus Estimate for ATO’s fiscal 2023 sales suggests an 18.2% improvement from the fiscal 2022 reported figure.
Teekay Tankers: It provides international marine transportation of crude oil and owns a fleet of nine double-hull Aframax-class oil tankers. On May 11, 2023, the company released its first-quarter 2023 results. Teekay reported first-quarter revenues worth $394.7 million, up from $174 million during the first quarter of 2022, while its adjusted earnings per share of $5.13 marked a solid improvement from the year-ago quarter’s loss of 41 cents.
TNK currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s 2023 sales suggests a 46.3% improvement from the fiscal 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.
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