5 low-leverage stocks to buy in a bullish market

US stocks rallied on October 25 as hopes rose that the Federal Reserve could ease its interest rate hike plans. The selection of the new British Prime Minister is also likely to have boosted investor confidence.

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 Equine EQNR, PBF Energy PBF, Merged Financial AMALE, warrior met coal HCC and Valero Energy VLO, 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 cheap and easy 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 that 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/equity analysis

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.

With the onset of the third quarter earnings cycle, 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 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 of #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 24 stocks that crossed the screen.

Equine: It is one of the world’s first integrated energy companies, with operations in 30 countries. In October 2022, the company announced that the development of serious incidents at Equinor had improved in the third quarter of 2022, compared to its second quarter report. No incident with major accident potential was recorded in the third quarter.

EQNR has posted a surprise profit of 7.33%, on average, over the past four quarters. He currently sports a Zacks rank of No. 1. Zacks’ consensus estimate for 2022 revenue implies a 139.3% improvement over the figure published in 2021.

PBF Energy: It is a major refiner of crude oil. In July 2022, the company released its second quarter 2022 results, which reflected the impact of tight global supply and higher post-pandemic demand. During the second quarter of 2022, the company invested approximately $52 million to pursue and incubate the project with the goal of being in production in the first half of 2023.

PBF currently carries a Zacks rank of No. 2. The company has made a surprise profit of 77.97% over the past four quarters, on average. The Zacks consensus estimate for 2022 revenue suggests a 954.4% year-over-year improvement.

Merged Financial: It provides commercial banking and trust services nationwide and offers products and services to commercial and retail customers. In August 2022, the company announced a $15 million loan to Inclusive Prosperity Capital, Inc., a 501(c)3 clean energy financing platform, making new capital available to fund climate initiatives benefiting to underserved market segments and communities.

AMAL sports a Zacks No. 1 ranking and has achieved a profit surprise of 22.60%, on average, over the past four quarters. Zacks consensus estimate for 2022 revenue shows a 44.2% improvement over the 2021 figure. You can see the full list of today’s Zacks #1 Rank stocks here.

warrior met coal: It is a producer and exporter of premium metallurgical coal. In August 2022, the company announced its second quarter results. Warrior Met Coal produced 1.7 million short tons of metallurgical coal in the second quarter of 2022, compared to 1.2 million short tons in the second quarter of 2021.

Currently, HCC has a Zacks ranking of 2. It has generated a 44.02% earnings surprise, on average, over the past four quarters. Zacks’ consensus estimate for 2022 revenue implies a 311.3% improvement over the figure published in 2021.

Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In October, Valero Energy announced its third quarter results. Valero ended the third quarter of 2022 with total debt of $9.6 billion, finance lease obligations of $1.9 billion and cash and cash equivalents of $4.0 billion,

VLO currently carries a Zacks rank of No. 2. It has generated a four-quarter earnings surprise of 33.54% on average. Zacks’ consensus estimate for 2022 revenue suggests an 850.2% improvement over the 2021 figure.

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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.

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Valero Energy Corporation (VLO): Free Inventory Analysis Report

Warrior Met Coal (HCC): Free Stock Analysis Report

PBF Energy Inc. (PBF): Free Stock Analysis Report

Equinor ASA (EQNR): Free Stock Analysis Report

Amalgamated Financial Corp. (AMAL): Free shares analysis report

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