US stocks have seen moderate improvement lately, with investors encouraged by positive earnings news from tech giants as well as oil giants last week.
In this context, an investor might feel encouraged to buy shares. However, before investing blindly in stocks that offer high returns, you need to know if those returns are sustainable. To this end, we recommend actions like Arch Resources CAMBER, Quanex Building Products NX, Pioneer of natural resources PXD, Matson MATX and Suncor Energy SU, which have low leverage and can therefore protect investors against losses in times of crisis.
Now, before picking 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 refer to the practice of borrowing capital by companies to run their operations smoothly and grow them. These borrowings are made through debt financing. But there is still an option for equity financing. This is likely due to the easy and cheap availability of debt compared to equity financing.
However, debt financing has its share of drawbacks. In particular, it is desirable only as long as it succeeds in generating a higher rate of return relative to the interest rate. So, to avoid huge losses in your portfolio, always avoid companies that resort to exorbitant debt financing.
Therefore, the key to a safe investment is choosing a company that is debt-free, as it is almost impossible to find a debt-free stock.
Such an event shows how volatile the stock market can sometimes be and as an investor, if you don’t want to waste a lot of time, we suggest you invest in stocks, which have low leverage and are therefore less risky.
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 lower debt ratio reflects an improvement in a company’s solvency.
As the second quarter earnings cycle continues, investors should look to stocks that have shown strong earnings growth over the past several years. But if a stock has a high debt-to-equity ratio during 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.
Yet, 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 the X-Industry median: Equities 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 the earnings growth forecast.
Zacks Rank #1 or 2: Regardless of market conditions, stocks with a Zacks #1 or 2 rank have a proven history of success.
Excluding stocks that have a negative or zero leverage ratio, here we present our five picks from the 38 stocks that crossed the screen.
Arch Resources: It is one of the largest coal producers in the United States, operating nine mines in the country’s major coalfields. In July 2022, the company released its second quarter 2022 results. Notably, the company repaid $135.8 million of its outstanding debt during the second quarter, reducing its total outstanding amount to just $187 million.
ARCH has generated a 6.35% earnings surprise, on average, over the past four quarters. He currently carries a Zacks rank of No. 2. Zacks’ consensus estimate for 2022 revenue implies a 210% improvement over the reported 2021 figure.
Quanex Building Products: It designs and manufactures energy-efficient fenestration products as well as kitchen and bathroom cabinet components. In June 2022, the company released its second quarter results. The company reported net sales of $322.9 million in the second quarter, representing year-over-year growth of 19.4%.
NX currently sports a No. 1 Zacks rank. The company has achieved a 30.20% earnings surprise over the past four quarters, on average. Zacks’ consensus estimate for 2022 revenue suggests a 34.3% year-over-year improvement.
Pioneer of natural resources: It is an explorer and producer of oil, natural gas and natural gas liquid. In July 2022, Pioneer Natural Resources released its 2022 Sustainability Report, which included the company’s plans to end routine flaring by 2025, five years earlier than PXD’s previous 2030 target. This commitment is consistent with World Bank standards and demonstrates Pioneer’s emphasis on environmental stewardship.
PXD carries a Zacks Rank No. 2 and has generated a 5.72% earnings surprise, on average, over the past four quarters. Zacks consensus estimate for 2022 revenue shows a 150.8% improvement over the 2021 figure. You can see the full list of today’s Zacks #1 Rank stocks here.
Matson: It operates as a shipping and logistics company. In July 2022, it announced preliminary results for the second quarter of 2022, which reflected higher year-over-year operating profit in shipping and logistics.
Currently, MATX has a Zacks Rank of 2. It has generated a 2.11% earnings surprise, on average, over the past four quarters. Zacks’ consensus estimate for 2022 revenue implies a 39% improvement over the reported 2021 figure.
Suncor Energy: It is the first integrated energy company in Canada. The Company’s activities include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining and product marketing. In June 2022, Suncor released its 2022 Sustainability and Climate Report, which reflected the company’s actions in sustainable energy development, highlighting progress made in accelerating GHG reductions to reach net zero d 2050.
SU currently carries a No. 2 Zacks rank. It has generated a four-quarter earnings surprise of 3.58% on average. Zacks’ consensus estimate for fiscal 2022 earnings suggests a 206.4% improvement over the figure released in 2021.
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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 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
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Pioneer Natural Resources Company (PXD): Free Stock Analysis Report
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