Buy these 5 Low-Leverage Stocks Amid Market Volatility
The recent developments in the U.S. economy are making it all the more difficult for investors to take a call. On the one hand, solid U.S. job growth along with improved productivity rate has set the stage for a probable rate hike at next week’s Fed meeting. However, trade deficit has increased considerably, indicating that a few broader economic forces remain an overhang on Trump administration’s plans to reshape the country’s international economic agenda. In fact, analysts are still unsure about how the nation will perform altogether under Trump.
A similar picture of volatility can be seen in the U.S. stock market. Though the major stock indices dipped yesterday with energy stocks suffering their worst decline in nearly six months, the stock market has been more or less stable post the election results last year.
Amid the uncertainty, it is better to be cautious and safe than repent later. Since debt ridden companies are more vulnerable at times of volatility, it is better to avoid those for achieving optimal returns.
Although entirely avoiding companies with debt load is impossible, eliminating those with an exorbitant debt load might be a wise idea. This is because the more the company is leveraged, the more vulnerable it is during a financial downturn.
So estimating the amount of debt a company currently bears is a crucial part of an equity investment decision. For that purpose, leverage ratios 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, widely used to evaluate a company’s credit worthiness, for potential equity investments
What’s Debt-to-Equity?
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
Debt-to-equity is a liquidity ratio that indicates the amount of financial risk a company bears. A higher debt-to-equity ratio indicates that the company uses more debt financing compared to equity financing, thereby investing in its stock could prove to be risky.
The fourth quarter saw total earnings reaching an all-time quarterly record and the highest growth in two years. Therefore, it is imperative that companies recording higher earnings growth will attract investors. But if they bear high leverage, then they might not generate satisfactory returns. This is because at the time of economic downturns, debt ridden companies are more prone to become victims of a debt trap.
The Winning Strategy
Considering the above discussion, it is obvious that a sensible investor will go for stocks bearing low debt-to-equity ratios. However, choosing stocks based solely on one financial metric might not fetch the desired outcome.
To ensure the maximum possible return from this strategy, we have expanded our screening procedure to include some other criteria.
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.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.
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 or 2 offer the best upside potential.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 14 stocks that made it through the screen.
Insight Enterprises, Inc. NSIT: This company is a global technology corporation that provides information technology (IT) hardware, software, cloud, and service solutions. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 6.80% in the trailing four quarters.
Louisiana-Pacific Corporation LPX: It manufactures and sells building products primarily for use in new home construction, repair and remodeling, and outdoor structures, as well as light industrial and commercial construction. The company carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 66.28% in the trailing four quarters.
Envestnet, Inc. ENV: This company provides financial and wealth management technology and services to financial advisors, investors, and financial service providers across the globe. It carries a Zacks Rank #2 and bodes a long-term EPS growth rate of 20%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Huntington Ingalls Industries, Inc. HII: This largest ship builder in the U.S. engages in designing, building, overhauling, and repairing of ships. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 19.85% in the trailing four quarters.
Aegean Marine Petroleum Network Inc. ANW: It operates as a marine fuel logistics corporation that markets and supplies refined marine fuel and lubricants to vessels in port, at sea, and on rivers worldwide. It carries a Zacks Rank #2 and reported a positive earnings surprise of 12.34% last quarter.
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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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Aegean Marine Petroleum Network Inc. (ANW): Free Stock Analysis Report
Louisiana-Pacific Corporation (LPX): Free Stock Analysis Report
Insight Enterprises, Inc. (NSIT): Free Stock Analysis Report
Envestnet, Inc (ENV): Free Stock Analysis Report
Huntington Ingalls Industries, Inc. (HII): Free Stock Analysis Report
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