5 Low-Leverage Stocks to Buy as Inflation Cools Down Slightly
U.S. stocks ended slightly higher on Jul 12, buoyed by investors’ optimism after consumer prices registered their smallest annual increase in more than two years, indicating some relief from the raging inflation hike observed in the recent past.
This should encourage investors to spend in the stock market. However, considering the volatile state that the Wall Street has been through lately, one should progress with caution. Hence, we recommend stocks like Humana HUM, The TJX Companies TJX, Sunstone Hotel Investors SHO, Atmos Energy ATO and MINISO Group Holding Limited MNSO, 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.
Analyzing Debt/Equity
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 15 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 (HMO), Private Fee-For-Service (PFFS) and Preferred Provider Organization (PPO) plans. In June 2023, Humana’s business, CenterWell Senior Primary Care, opened its 250th senior primary care facility. The business is part of HUM’s Primary Care Organization. The move marks Humana’s continuous growth in the healthcare provider space.
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.
TJX Companies: It is a leading off-price retailer of apparel and home fashions in the United States and worldwide. On May 17, 2023, the company announced its first-quarter fiscal 2024 results. Its net sales for the first quarter of fiscal 2024 were $11.8 billion, an increase of 3% from the first quarter of fiscal 2023.
TJX currently has a Zacks Rank #2. The company delivered an earnings surprise of 4.38% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales suggests a 6.4% improvement year over year.
Sunstone Hotel Investors: It is a lodging real estate company that owns hotels primarily in the upper-upscale and upscale segments, primarily operated under franchises owned by nationally-recognized companies. On May 5, 2023, the company released its first-quarter 2023 results. Its net income in the reported quarter improved a solid 39.4% year over year to $21.1 million, while its comparable RevPAR surged 32%.
SHO currently carries a Zacks Rank #2. The company delivered an earnings surprise of 22.43% on average in the trailing four quarters. The Zacks Consensus Estimate for SHO’s 2023 sales indicates a 10.8% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 a 22.3% improvement from the fiscal 2022 reported figure.
MINISO Group: It is a retailer offering design-led lifestyle products. On May 16, 2023, the company released its third-quarter fiscal 2023 report. Its quarterly revenues improved a solid 26.2% year over year to $430.2 million, while operating profit surged a massive 308.5% to $83.9 million.
MNSO currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 51.9%. The Zacks Consensus Estimate for MNSO’s fiscal 2023 sales suggests a 5.3% improvement from the fiscal 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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The TJX Companies, Inc. (TJX) : Free Stock Analysis Report
Humana Inc. (HUM) : Free Stock Analysis Report
Sunstone Hotel Investors, Inc. (SHO) : Free Stock Analysis Report
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
MINISO Group Holding Limited Unsponsored ADR (MNSO) : Free Stock Analysis Report
