U.S. stocks ended on a mixed note on Feb 17, following Federal Reserve officials’ comments on renewed fears about interest rates. Persistent inflation also continued to be a major concern for investors.
However, this should not dissuade investors from putting their money in the stock market. In fact, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Rollins ROL, Alaska Air Group ALK, Linde LIN, Skyline SKY and State Street STT, which bear low leverage and, therefore, 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.
Therefore, 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.
Such an event shows how volatile the equity market can be 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 fourth-quarter earnings cycle going on full-fledged, 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 with a negative or a zero debt-to-equity ratio, here we present five out of 13 picks that made it through screening.
Rollins: It provides pest and termite control services to residential and commercial customers. The company offers protection against termite damage, insects and rodents to homes and businesses, including food manufacturers, food service establishments, hotels, transportation companies and retailers. On Feb 15, 2023, Rollins released its fourth-quarter 2022 results. Its fourth-quarter revenues were $661.4 million, an increase of 10.2% from the fourth quarter of 2021.
ROL delivered an earnings surprise of 5.85%, on average, in the trailing four quarters. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2023 earnings implies a 6.7% improvement from the 2022 reported figure.
Alaska Air Group: This airline company, together with its partner regional carriers, serves more than 120 cities across North America. In January 2023, Alaska Air announced its fourth-quarter 2022 results. The company reported operating revenues of $2,479 million in the fourth quarter, up 31% year over year.
ALK currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2023 earnings suggests a 32.6% improvement from the 2022 reported figure. It delivered an earnings surprise of 8.98%, on average, in the trailing four quarters.
Linde: It is a leading producer of industrial gases utilized in various industries like chemicals & refining, food & beverage, electronics, healthcare, manufacturing, and primary metals. On Feb 8, 2023, Linde Engineering signed an agreement with BASF for the engineering, procurement and construction of a synthesis gas plant in Zhanjiang, China.
LIN currently carries a Zacks Rank #2. It delivered an earnings surprise of 5.87%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2023 earnings indicates an 8.1% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Skyline: It designs, produces and distributes manufactured housing and recreational vehicles. On Feb 6, 2023, Skyline announced its third-quarter fiscal 2023 results. Its net sales for third- quarter fiscal 2023 increased 8.9% from the prior-year period to $582.3 million.
SKY currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 43.18%, on average. The Zacks Consensus Estimate for fiscal 2023 earnings suggests a 55.6% improvement from the 2022 reported figure.
State Street: It provides a range of products and services for institutional investors worldwide through its subsidiaries. On Jan 27, 2023, State Street announced that it has joined forces with black-owned businesses to underwrite $1.25 billion of senior unsecured debt, thereby reinforcing its commitment to strengthen Black-owned businesses.
STT currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 5.89%, on average. The Zacks Consensus Estimate for 2023 earnings suggests a 15.1% improvement from the 2022 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: https://www.zacks.com/performance.
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