US stock indexes ended in the red, following weaker-than-expected profits from major banks. Investors might also have been spooked by the market consensus that aggressive moves by the Federal Reserve to control soaring prices could push America into a recession.
In this context, one might not feel confident about investing in stocks. However, this should not stop equity investment. Instead, pick a stock that has the potential to deliver strong returns. Keeping this in mind, we recommend actions such as Arch Resources CAMBER, Valero Energy VLO, Apple Hospitality REIT APPLE, Matson MATX and Pact Logistics Group CVLG, 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, 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 knocks upon 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 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 #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 37 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. The company’s June 2022 Sustainability Report included an in-depth discussion of the company’s significant and continued progress in its 10-year pivot to global steel and metallurgical coal markets, which are expected to play a critical role in building a new low-carbon economy market.
ARCH has generated a 10.71% 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.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In June 2022, Valero said the company had reduced its debt by approximately $300 million through the acquisition of $300 million of Gulf Opportunity Zone Revenue Bonds Series 2010 4% Tax Bonds.
VLO currently sports a Zacks No. 1 rank. The company has made a surprise profit of 84.26% over the past four quarters, on average. Zacks’ consensus estimate for 2022 revenue suggests a 35.4% year-over-year improvement.
Apple Hospitality REIT: It is a real estate investment company. Its portfolio consists of hotels, bed and breakfasts and resorts. In June 2022, Apple Hospitality REIT announced the winners of the company’s 2021 Apple Awards.
APLE carries a No. 2 Zacks rank and has generated a 16.93% earnings surprise, on average, over the past four quarters. Zacks consensus estimate for 2022 revenue shows a 26.9% 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 June 2022, its board of directors declared a 3.3% increase in the quarterly dividend.
Currently, MATX has a Zacks Rank of 1 and has generated an earnings surprise of 2.11%, on average, over the past four quarters. Zacks’ consensus estimate for 2022 revenue implies a 13% improvement over the reported 2021 figure.
Alliance Logistics: It offers a portfolio of transport and logistics services, through its subsidiaries. In May 2022, the Company’s Board of Directors approved a new share repurchase authorization of up to $75 million following the recent completion of the previously announced $30 million 10b5-1 repurchase plan .
CVLG currently carries a Zacks rank of No. 2. It has generated a four-quarter earnings surprise of 27.97% on average. Zacks’ consensus estimate for fiscal 2022 earnings suggests a 10.7% improvement over the 2021 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 the options mentioned herein. An affiliated investment adviser 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
Zacks names ‘only one best choice for doubling up’
From thousands of stocks, 5 Zacks experts have each picked their favorite to skyrocket by +100% or more in the coming months. Of these 5, Research Director Sheraz Mian selects one to have the most explosive advantage of all.
It’s a little-known chemical company that’s up 65% year-on-year, but still very cheap. With relentless demand, rising earnings estimates for 2022 and $1.5 billion for stock buybacks, retail investors could jump in at any moment.
This company could rival or surpass other recent Zacks stocks which are expected to double, such as Boston Beer Company which jumped +143.0% in just over 9 months and NVIDIA which jumped +175.9% in one. year.
Free: See our best stock and our 4 finalists >>
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Valero Energy Corporation (VLO): Free Stock Analysis Report
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Covenant Logistics Group, Inc. (CVLG): Free Inventory Analysis Report
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