Want to Invest in Stocks? Buy These 5 Low-Leverage Equities
The U.S. stock market went through quite an upheaval in the recent past as a cloud of uncertainty loomed large over Russia’s invasion of Ukraine and its subsequent repercussions, particularly on the oil price. However, Wall Street rebounded on Mar 24, buoyed by a spike in tech stocks and a dip witnessed in oil price ahead of a NATO meeting on the Russia-Ukraine crisis.
With world leaders tightening sanctions on Russia, the near-term fate of the stock market remains a bit turbulent. Amid such volatility, one might be inclined to choose safe stocks like AdvanSix ASIX, Quanex Building Products NX, Credicorp BAP, Suncor Energy SU and Exxon Mobil XOM, which bear low leverage.
Now one must know the concept of leverage and its importance in the investment world before choosing low-leverage stocks.
Notably, leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. Although this borrowing can be done through equity or debt financing, statistically it has been observed that debt financing is preferred over equity by the majority of corporations.
This preference is probably due to the cheap and easy availability of debt over equity financing.
However, at times debt financing can be detrimental for a company’s prospects, especially when a company bears too much debt compared to its assets. So, one should look for stocks that are not heavily burdened with debt.
So, the next step should be how to identify such stocks that are not overburdened with debt as a debt-free stock is almost impossible to find.
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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the first-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 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 we present our five picks out of the 29 stocks that made it through the screen.
AdvanSix: It is a producer and supplier of Nylon 6 materials. ASIX announced its fourth-quarter 2021 results in February, with year-over-year sales growth of 45%. The company also announced it has agreed to acquire U.S. Amines, which is a leading North American producer of alkyl and specialty amines, for $100 million. This should strengthen AdvanSix’s position in the chemical industry.
AdvanSix delivered an earnings surprise of 23.63%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 53% in the past 60 days.
Quanex Building Products: It designs and produces energy-efficient fenestration products in addition to kitchen and bath cabinet components. NX recently announced its first-quarter fiscal 2022 results, wherein its sales improved 16% year over year. This growth was driven by volume increases in the fenestration segments combined with higher prices related to the pass-through of raw material cost inflation.
Quanex Building Products currently carries a Zacks Rank #2. The company delivered an earnings surprise of 17.37% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 3.2% in the past 60 days.
Credicorp: It is the largest financial services holding company in Peru with extensive experience in the Peruvian financial market. Its net interest income increased 19.8% year over year in fourth-quarter 2021, while the efficiency ratio expanded 230 basis points.
BAP carries a Zacks Rank of 2 and boasts a long-term earnings growth rate of 18.6%. The Zacks Consensus Estimate for 2022 earnings has moved up 9.6% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Suncor Energy: It is a premier integrated energy company. Its operations include oil sands development and upgrade, conventional and offshore crude oil and gas production, petroleum refining, and product marketing. Suncor reported fourth-quarter 2021 adjusted operating earnings of 89 cents per share, reflecting an improvement from the adjusted operating loss of 7 cents incurred in the prior-year quarter.
Currently, Suncor has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 13.8%. Its 2022 earnings estimate has improved 19.5% over the past 60 days.
Exxon Mobil: It is one of the world's largest publicly traded international oil and gas companies. Exxon Mobil announced its plans at its annual Investor Day this March to deliver industry-leading earnings, cash flow growth and shareholder returns, and lead in the energy transition across a range of lower-emissions scenarios. To improve future earnings, XOM is upgrading its portfolio with low-cost-of-supply opportunities by investing in advantaged assets, including Guyana and the U.S. Permian Basin.
Exxon Mobil currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 5.81%, on average. Its 2022 earnings estimate has improved 20.6% over the past 60 days.
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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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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Suncor Energy Inc. (SU) : Free Stock Analysis Report
Quanex Building Products Corporation (NX) : Free Stock Analysis Report
Credicorp Ltd. (BAP) : Free Stock Analysis Report
AdvanSix (ASIX) : Free Stock Analysis Report
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