The U.S. market ended on a solid note on Aug 29, driven by investments witnessed in tech stocks, which made them rebound from the recent slumps, amid declines observed in the Job Openings and Labor Turnover Survey.
Investors are now expected to turn their attention to the most anticipated dataset this week — the August jobs report. In the current scenario, we recommend stocks like Sprouts Farmers Market SFM, PulteGroup PHM, Kirby Corp. KEX, 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 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 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 22 stocks that made it through the screen.
Sprouts Farmers Market: The company has a unique model that features fresh produce, a foods section and a vitamin department focused on overall wellness. It operates in a highly fragmented grocery store industry. On Aug 1, 2023, Sprouts Farmers announced its second-quarter 2023 results. Its net sales of $1.7 billion increased 6% from the year-ago quarter’s sales. The company opened six new stores as of Jul 2, 2023.
SFM delivered an earnings surprise of 14.26%, on average, in the trailing four quarters. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales implies a 5.7% improvement from the 2022 reported figure.
PulteGroup: It engages in homebuilding and financial services businesses, primarily in the United States. On Jul 25, 2023, the company reported its second-quarter 2023 results. Its net new orders increased 24% from last year, while home sale revenues for the second quarter increased 8% from the prior year to $4.1 billion.
PHM currently sports a Zacks Rank #1. The company delivered an earnings surprise of 19.51% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 0.4% improvement year over year.
Kirby: It is the largest domestic tank barge operator in the United States. On Aug 25, 2023, Kirby christened the GREEN DIAMOND, the nation’s first plug-in hybrid electric inland towing vessel, at a ceremony in Houston, TX. The vessel was constructed by San Jac Marine, LLC, Kirby’s shipyard in Channelview, TX. Stewart & Stevenson Manufacturing Technologies, another Kirby company, designed and installed the power management, control and propulsion systems. A host of vendors provided other key systems for this first-of-its-kind vessel.
KEX currently carries a Zacks Rank #2. The company delivered an earnings surprise of 8.03% on average in the trailing four quarters. The Zacks Consensus Estimate for KEX’s 2023 sales indicates a 11.2% 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 Aug 2, 2023, the company reported its third-quarter fiscal 2023 results. Its operating revenues of $662.7 million went down 18.8% year over year.
ATO currently carries a Zacks Rank #2. The company delivered an earnings surprise of 2.40% 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 Aug 3, 2023, the company reported its second-quarter 2023 results. Its total revenues of $370.6 million were up from $242.4 million at the end of second-quarter 2022.
TNK currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s 2023 sales suggests a 53.3% improvement from the 2022 reported figure.
PulteGroup, Inc. (PHM): Free Stock Analysis Report
This article originally appeared on Zacks
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