Buy These 5 Low-Leverage Stocks Amid Russia-Led Volatility
U.S. stocks tumbled on Jun 26, as investors became worried after a brief mutiny broke out in Russia over the weekend. It raised concerns about potential disruptions in global oil supplies.
Considering the current situation, an investor might not feel encouraged to invest in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Terex Corp TEX, The TJX Companies TJX, Linde PLC LIN, Apollo Commercial Real Estate Finance ARI and Alaska Air Group ALK, 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 ahead of 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 11 stocks that made it through the screen.
Terex: It is a global manufacturer of aerial work platforms, materials processing machinery and cranes. On May 1, 2023, the company released its first-quarter 2023 results. Its quarterly sales of $1.2 billion improved 23% year over year, while earnings per share of $1.60 surged 116.2% from the year-ago quarter.
TEX delivered an earnings surprise of 27.06%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2023 sales implies an 11.9% 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.
Linde: It is a leading producer of industrial gases that are being utilized in various industries like chemicals & refining, food & beverage, electronics, healthcare, manufacturing and primary metals. On May 2, 2023, it was announced that the Great Lakes Clean Hydrogen Hub coalition (GLCH), a partnership among Linde and a few other organizations, had submitted a full application for federal funding from the $8 billion U.S. Department of Energy program to support the creation of regional clean hydrogen hubs. This should enhance Linde’s footprint in the hydrogen market.
LIN currently carries a Zacks Rank #2. The company delivered an earnings surprise of 6.92% on average in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales indicates a 2.6% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Apollo Commercial: It is focused on investing in, acquiring and managing senior performing commercial real estate mortgage loans, commercial mortgage-backed securities, commercial real estate corporate debt and loans, and other real estate debt investments. On Apr 23, 2023, the company revealed its first-quarter 2023 results. Its distributable earnings and distributable earnings prior to net realized loss on investments and realized gain on extinguishment of debt per share of common stock was 48 cents and 51 cents, respectively.
ARI currently carries a Zacks Rank #2. The company delivered an earnings surprise of 4.30% on average in the trailing four quarters. The Zacks Consensus Estimate for ARI’s 2023 sales suggests a 16.3% improvement from the 2022 reported figure.
Alaska Air Group: It is an airline company that serves more than 120 cities across North America. On Jun 21, 2023, Alaska Airlines announced that it is partnering with CLEAR – the secure identity company – to provide friction-free and predictable travel experiences with CLEAR Plus. With this new partnership, ALK’s Mileage Plan members can take advantage of a discounted rate for a CLEAR Plus membership and also receive bonus miles for a limited time.
ALK currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 24.2%. The Zacks Consensus Estimate for ALK’s 2023 sales suggests an 8.8% 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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The TJX Companies, Inc. (TJX) : Free Stock Analysis Report
Terex Corporation (TEX) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
Linde PLC (LIN) : Free Stock Analysis Report
Apollo Commercial Real Estate Finance (ARI) : Free Stock Analysis Report
