Buy These 5 Low-Leverage Stocks Amid Waning Inflation Woes
U.S. stocks gained sharply on Feb 2 after Federal Reserve chair Jerome Powell gave indications of progress witnessed in the nation’s inflation scenario.
This might excite investors to bet on stocks that are already showing signs of growth. However, a prudent investor knows that only a growth-exhibiting character is insufficient when choosing a stock. If one wants to avoid huge losses in times of crisis, one needs to look for relatively safe bets. To this end, we recommend stocks like Oxford Industries OXM, Alaska Air Group ALK, Linde LIN, Preferred Bank PFBC and RenaissanceRe RNR, 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 fourth-quarter earnings cycle going on full-fledged, 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 with a negative or a zero debt-to-equity ratio, here we present five out of nine picks that made it through screening.
Oxford Industries: It is an apparel company, which designs, sources, markets and distributes products bearing the trademarks of its owned and licensed brands. On Dec 7, 2022, the company announced its third-quarter fiscal 2022 results. Its consolidated net sales increased 26% year over year to $313 million in the last reported quarter.
OXM delivered an earnings surprise of 18.94%, on average, in the trailing four quarters. It currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2023 earnings implies a 34.4% improvement from the fiscal 2022 reported figure.
Alaska Air Group: This airline company, together with its partner regional carriers, serves more than 120 cities across North America. In January 2023, Alaska Air announced its fourth-quarter 2022 results. The company reported operating revenues of $2,479 million in the fourth quarter, up 31% year over year.
ALK currently carries a Zacks Rank #2. The Zacks Consensus Estimate for its 2023 earnings suggests a 28.3% improvement from the 2022 reported figure. It delivered an earnings surprise of 8.98%, on average, in the trailing four quarters.
Linde: It is a leading producer of industrial gases utilized in various industries like chemicals & refining, food & beverage, electronics, healthcare, manufacturing, and primary metals. On Dec 7, 2022, Linde announced that its Linde Kryotechnik subsidiary had signed a contract to supply the CERN laboratory in Geneva, Switzerland, with two identical helium cryogenic refrigeration systems.
LIN currently carries a Zacks Rank #2. It delivered an earnings surprise of 4.66%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2023 earnings indicates a 7.7% improvement from the 2022 estimated figure.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Preferred Bank: It is one of the largest independent commercial banks in California, focusing on the China-America market. On Jan 18, 2023, the company reported fourth-quarter 2022 results. PFBC reported a net income of $39.6 million for the fourth quarter of 2022, representing an increase of 49.7% over the same quarter last year.
PFBC currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 6.67%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 17.4% improvement from the 2022 reported figure.
RenaissanceRe: It primarily provides property-catastrophe reinsurance to insurers and reinsurers globally on the basis of excess loss (coverage of losses over a specified limit). On Jan 31, 2023, the company reported its fourth-quarter 2022 results. Its net investment income of $211.2 million in the fourth quarter improved year over year by a solid 162.5%.
RNR currently sports a Zacks Rank #1. It delivered an earnings surprise of 11.40% in the last reported quarter. The Zacks Consensus Estimate for 2023 earnings suggests a 209.2% 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.
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RenaissanceRe Holdings Ltd. (RNR) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
Oxford Industries, Inc. (OXM) : Free Stock Analysis Report
Preferred Bank (PFBC) : Free Stock Analysis Report
Linde plc (LIN) : Free Stock Analysis Report
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