Wall Street tumbled last Friday, mostly hit by falling shares of bigwig FedEx, with management warning investors to be wary of a sharp drop in package deliveries amid fears of a slowdown in demand in the coming months.
No doubt this has spooked all investors who already fear another rate hike by the Federal Reserve to fight inflation. Nonetheless, a cautious investor can take advantage of this situation to buy stocks that are safe bets amid the current economic turmoil. Some of these actions are You’re here (TSLA – free report), EchoStar (SAT – free report), Merged Financial (AMALE – free report), Titan Machinery (TIN – free report) and PBF Energy (PBF – free report). These shares have a low leverage effect.
Now one might ask why low leverage stocks?
For this, one must be well aware of what leverage is and how choosing stocks with low leverage can prevent an investor from incurring huge losses.
Basically, leverage is a term used to refer to the practice of borrowing capital by companies to run their operations smoothly and grow them. These borrowings are primarily done through debt financing, although there remains an equity financing option. This is likely due to the cheap and easy availability of debt compared to equity financing.
However, debt financing can sometimes be detrimental to a company’s prospects, especially when a company is too leveraged relative to its assets. So look for stocks that aren’t heavily leveraged.
So, the next step should be how to identify those stocks that are not burdened with debt, because a debt-free stock is almost impossible to find.
To identify these actions, several leverage ratios have historically been developed to measure the amount of debt a company has and the debt-to-equity ratio is one of the most common ratios.
Debt Ratio = Total Liabilities/Equity
This measure is a liquidity ratio that indicates the amount of financial risk that a company bears. A company with a lower debt ratio shows improved creditworthiness for a company.
With the second quarter earnings cycle behind us, investors should look to stocks that have shown strong earnings growth over the past few years. But if a stock has a high leverage ratio, in an economic downturn its so-called booming earnings picture could turn into a nightmare.
The winning strategy
Considering the above factors, it is prudent to choose stocks with a low leverage ratio to ensure regular returns.
However, an investment strategy based solely on the debt ratio might not yield the desired result. To choose stocks that have the potential to give you stable returns, we’ve expanded our selection criteria to include other factors.
Here are the other settings:
Debt/equity below X-Industry median: Stocks less leveraged than their sector counterparts.
Current price greater than or equal to 10: Stocks must trade at a minimum of $10 or more.
Average volume over 20 days greater than or equal to 50000: A substantial trading volume ensures that the security is easily tradable.
Percentage change in EPS F(0)/F(-1) above industry median X: Earnings growth adds to optimism, causing a stock price to appreciate.
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 most upside potential.
Estimated one-year EPS growth F(1)/F(0) greater than 5: This shows earnings growth forecasts
Zacks Ranking #1 or 2: Regardless of market conditions, stocks with a Zacks #1 (Strong Buy) or 2 (Buy) ranking have a proven history of success.
Excluding stocks that have a negative or zero leverage ratio, here we present our five picks from the 30 stocks that crossed the screen.
You’re here : It is the leader in battery electric car sales in the United States, with around 60% market share. In August 2022, its board of directors approved a three-for-one split of Tesla common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors.
Tesla has delivered a 32.17% earnings surprise, on average, over the past four quarters and currently holds a Zacks No. 2 rank. The stock is posting a long-term earnings growth rate of 31.2% .
EchoStar: It is a global provider of satellite service operations, video broadcasting services, broadband satellite technologies and broadband Internet services for individuals and small businesses. EchoStar recently announced that Hughes Network Systems has begun rolling out a new low-latency satellite internet offering for consumers in select US markets. Available as HughesNet Fusion plans, the multipath offering seamlessly combines geostationary satellite and wireless technologies into a fast and responsive satellite internet experience.
EchoStar currently carries a Zacks rank of No. 2. The company made a surprise profit of 15.63% in the last reported quarter. Zacks consensus estimate for SATS earnings in 2022 implies a 171.8% improvement over the figure reported in 2021.
Merged Financial: It provides commercial and trust banking services nationwide and offers products and services to commercial and retail customers. In July 2022, the company announced its second quarter results. Its deposits grew 4.6% on a linked quarterly basis.
Amalgamated Financial offered a four-quarter earnings surprise of 22.60%, on average, and carries a Zacks ranking of 2. The Zacks consensus estimate for AMAL’s earnings in 2022 implies a 42.4% improvement compared to the figure published in 2021. You can see the full list of today’s Zacks #1 Rank stocks here.
Titan Machinery: It is a multi-unit company, which owns and operates a network of full-service agricultural and construction equipment stores in the United States and Europe. TITN’s revenue in the second quarter of fiscal 2023 increased 31.5% year over year, while adjusted earnings improved 96.4%.
Currently, Titan Machinery sports a Zacks ranking of 1. It has generated a four-quarter earnings surprise of 59.48%, on average. Its earnings estimate for fiscal 2023 reflects an 18% year-on-year improvement.
PBF Energy: It is a major refiner of crude oil. Through five petroleum refineries and associated infrastructure in the United States, the company provides finished products including fuel oil, transportation fuels, lubricants and many related products. In July 2022, PBF Energy released its second quarter 2022 results. The company reduced its consolidated debt by more than $2.2 billion during the quarter under review.
PBF Energy currently sports a No. 1 Zacks ranking and delivered a four-quarter earnings surprise of 77.97%, on average. The Zacks consensus estimate for PBF revenue in 2022 indicates an 898.4% improvement over the figure reported in 2021.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold securities short and/or hold long and/or short positions in the options mentioned herein. An affiliated investment advisory firm may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.