5 Low-Leverage Stocks to Buy as Inflation Fear Eases
The majority of U.S. stock rallied on Nov 2, reflecting investors’ optimism on the unchanged interest rate kept by the U.S. Federal Reserve. Moreover, latest data reflecting easing inflation and an unexpected drop in labor costs seem to have bolstered investors’ confidence.
Against this backdrop, stock market players might be in the mood for some good investments. However, since the share market has lately been on edge, we recommend stocks like Textron TXT, Patterson-UTI Energy PTEN, ALLETE Inc ALE, Teekay Tankers TNK and Acadia Healthcare ACHC, which bear low leverage. Choosing them can shield investors from incurring huge 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 third-quarter earnings cycle progressing towards its last lap, 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 20 stocks that made it through the screen.
Textron: The company is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. On Oct 24, 2023, Textron announced that German airline — Hahn Air — has signed an agreement to purchase TXT’s Cessna Citation CJ3 Gen2 aircraft and a Cessna Citation Latitude jet. Both aircraft are expected to be delivered in 2026. This reflects the growing demand for the company’s jets in Europe.
TXT boasts a long-term earnings growth rate of 11.7%. It holds a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2023 sales suggests a 7.5% improvement year over year.
Patterson-UTI Energy: It is an oilfield services company. On Sep 1, 2023, the company announced the completion of its all-stock merger with NexTier Oilfield Solutions Inc. ("NexTier"), thereby creating a leading provider of drilling and completions services in the United States. The combined company is well-positioned to deliver value through its comprehensive portfolio, innovative offerings, significant free cash flow generation and strong financial position.
PTEN currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 54.4%. The Zacks Consensus Estimate for 2023 sales suggests a 52.6% improvement year over year.
ALLETE: It is an energy company. On Nov 2, 2023, ALLETE reported its third-quarter 2023 results. ALE’s earnings of $1.49 per share reflect an improvement of 152.5% from the prior year quarter’s reported figure.
ALE currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 8.10%. The Zacks Consensus Estimate for ALE’s 2023 sales indicates an improvement of 23.8% from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teekay Tankers: It is the largest operator of mid-sized tankers, including suezmax, aframax, and long-range two vessels. On Nov 2, 2023, Teekay Tankers announced its third-quarter 2023 results. Its revenues improved 2.3% year over year to $285.9 million.
TNK currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 3%. The Zacks Consensus Estimate for TNK’s sales suggests a 56.1% improvement from the 2022 reported figure.
Acadia Healthcare: It provides behavioral health care services in the United States. On Nov 2, 2023, the company released its third-quarter 2023 results. Its revenues increased 12% year over year to $750.3 million, while adjusted earnings improved 13.8% to 91 cents per share.
ACHC currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 11.6%. The Zacks Consensus Estimate for ACHC’s 2023 sales suggests a 10.5% 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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Textron Inc. (TXT) : Free Stock Analysis Report
Patterson-UTI Energy, Inc. (PTEN) : Free Stock Analysis Report
Allete, Inc. (ALE) : Free Stock Analysis Report
Acadia Healthcare Company, Inc. (ACHC) : Free Stock Analysis Report
Teekay Tankers Ltd. (TNK) : Free Stock Analysis Report
