5 Low Leverage Stocks to Buy for Safety in Times of Crisis
It is always profitable for an investor to keep safe-bet stocks in his or her portfolio to minimize loss impact at times of crisis. So, the next question that comes to our mind is how to choose such safe-bet stocks. The answer is to select companies that are not hugely debt-ridden since it is almost impossible to find a debt-free stock.
Here comes the importance of the term “leverage”, which refers to the strategy of borrowed capital that companies use to run their operations. Now, the relation between leverage and debt lies in the fact that the majority of the firms prefer debt financing over equity financing, to avoid equity dilution, for capital borrowing.
Therefore, in most cases, leverage indicates debt financing. However, debt financing is not always desirable and remains a feasible option only as long as the companies succeed in generating a higher rate of return compared to the interest rate. Exorbitant debt financing might even lead to a corporation’s bankruptcy in the worst-case scenario.
It is for this reason that while choosing a safe-bet stock, a prudent investor should be aware of its debt level. If a stock is highly leveraged, which means it possesses considerably high debt, it is wise to avoid it.
Considering the aforementioned discussion, a low-leverage stock should find a place in an investor’s portfolio. For measuring this leverage, several ratios have been used historically. The debt-to-equity ratio is one of the most common among such 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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the third-quarter earnings season almost at our doorstep, investors must be eyeing stocks that exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, 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.
However, 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 (Strong Buy) or 2 (Buy) have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 29 stocks that made it through the screen.
Titan Machinery TITN: It owns and operates a network of over 70 full-service agriculture and construction equipment stores across nine states in the United States and six countries in Europe. The company delivered an earnings surprise of 90.20%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently.
Herc Holdings HRI: It provides equipment rental suppliers primarily in North America. The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 120.42% in the trailing four quarters, on average.
Boise Cascade BCC: It operates as a wood products manufacturer and building materials distributor. The company came up with a four-quarter earnings surprise of 61.59%, on average, and has a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Selective Insurance Group SIGI: It offers insurance products and services across the United States. Currently, the company holds a Zacks Rank of 2. It came up with a four-quarter earnings surprise of 42.10%, on average.
Schneider National SNDR: It is a leading transportation and logistics services company. The company currently carries a Zacks Rank #2 and delivered a four-quarter earnings surprise of 15.65%, on average.
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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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Titan Machinery Inc. (TITN) : Free Stock Analysis Report
Selective Insurance Group, Inc. (SIGI) : Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC) : Free Stock Analysis Report
Herc Holdings Inc. (HRI) : Free Stock Analysis Report
Schneider National, Inc. (SNDR) : Free Stock Analysis Report
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