5 Low Leverage Stocks to Buy Amid U.S. Stock Indices' Rally
U.S. stocks indices rallied on Dec 12, backed by investors’ optimism about inflation data due on Dec 13 and an upcoming policy announcement from the Federal Reserve.
Against this backdrop, an investor might feel encouraged to buy some stocks. However, instead of selecting stocks based on high return rates, a prudent investor will look to choose stocks that provide sustainable returns. To this end, we recommend stocks like MGIC Investment MTG, Titan Machinery TITN, ChampionX CHX, Chatham Lodging Trust REIT CLDT and Axcelis Technologies ACLS, 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 third-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 23 stocks that made it through the screen.
MGIC Investment: It is the parent company of Mortgage Guaranty Insurance Corporation, the largest private mortgage insurer in the United States. In early December 2022, the company announced its partnership with Vesta, a modern mortgage loan origination system (LOS) and software-as-a-service company. With this partnership, lenders using the Vesta platform will be able to seamlessly and in real time, request quotes and order private mortgage insurance from MGIC without leaving the Vesta LOS.
MTG delivered an earnings surprise of 5%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings implies a 49.7% improvement from the 2021 reported figure.
Titan Machinery: It represents a diversified mix of agricultural, construction, and consumer products dealerships located in the upper Midwest. In November 2022, the company posted its fiscal 2023 third-quarter results. The company reported Q3 net sales of $668.8 million, representing growth of 47.3% year over year.
TITN currently sports a Zacks Rank #1. The company delivered an earnings surprise of 59.91% in the trailing four quarters, on average. The Zacks Consensus Estimate for fiscal 2023 earnings suggests a 62.1% improvement year over year.
ChampionX: The company provides chemistry solutions and engineered equipment and technologies to drill for and produce oil and gas. At the end of November 2022, ChampionX announced that it has been named ExxonMobil’s 2022 “Supplier of the Year.”
CHX carries a Zacks Rank #2 and delivered an earnings surprise of 9.57%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 105% improvement from the 2021 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chatham Lodging: It is a self-advised hotel REIT formed to invest in premium-branded upscale extended-stay and select-service hotels. In November 2022, the company revealed its third-quarter 2022 results. Notably, its Portfolio Revenue Per Available Room Increased 34% on a year-over-year basis in the reported quarter, while net income significantly improved from a loss of $1.4 million in third-quarter 2021 to income of $12.4 million in the third quarter of 2022.
CLDT currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 204.57%, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 303.5% improvement from the 2021 reported figure.
Axcelis Technologies: It is a leading producer of ion implantation equipment used in the fabrication of semiconductors. The company recently revealed its multiple shipments of the Purion Dragon high current implanter, including a follow-on order and a new customer evaluation to semiconductor manufacturers in Asia for advanced memory and advanced logic device development and device fabrication
ACLS currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 23.21%, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 66.7% improvement from the 2021 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.
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MGIC Investment Corporation (MTG) : Free Stock Analysis Report
Axcelis Technologies, Inc. (ACLS) : Free Stock Analysis Report
Titan Machinery Inc. (TITN) : Free Stock Analysis Report
Chatham Lodging Trust REIT (CLDT) : Free Stock Analysis Report
ChampionX Corporation (CHX) : Free Stock Analysis Report
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