US stocks fell sharply on April 26 on growing concerns over the spread of COVID-19 in China and fears it could spread elsewhere. The ongoing war in Ukraine and inflationary pressures further spooked investors.
In the midst of such uncertainties, investors often become fragile. But instead of completely hesitating to invest, they can choose less risky stocks like warrior met coal HCC, Valero Energy VLO, Creditcorp BAP, EOG Resources EOG and Marathon Oil Low leverage MRO.
Now, this might lead to the question of why one should choose low leverage stocks. To answer this, we must first be aware of what leverage is.
To begin with, the term leverage is used to refer to the practice of borrowing capital by companies to run their operations smoothly and grow them. These borrowings are done 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 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 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 first quarter earnings cycle, investors should look to stocks that have shown strong earnings growth over the past few 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 A or B rating: 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 48 stocks that crossed the screen.
warrior met coal: It is a producer and exporter of premium metallurgical coal. In February 2022, HCC announced that its Board of Directors had approved a 20% increase in the regular quarterly cash dividend.
Warrior Met Coal has generated an earnings surprise of 84.48%, on average, over the past four quarters and currently sports a Zacks No. 1 ranking. Zacks consensus estimate for 2022 revenue rose 74 .1% in the last 60 days.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. VLO reduced its long-term debt by approximately $750 million in February 2022 through previously announced debt reduction and refinancing operations.
Valero Energy currently carries a Zacks rank of No. 2. The company has made a surprise profit of 75.74% over the past four quarters, on average. Zacks’ consensus estimate for 2022 revenue is up 33% over the past 60 days.
Creditcorp: 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 the fourth quarter of 2021 and the efficiency ratio increased by 230 basis points.
BAP carries a No. 2 Zacks rank and boasts a long-term earnings growth rate of 22.5%. The Zacks consensus estimate for 2022 revenue is up 5.4% over the past 60 days. You can see the full list of today’s Zacks #1 Rank stocks here.
EOG Resources: It is mainly involved in the exploration and production of petroleum and natural gas. In February 2022, EOG Resources released its fourth quarter and full year 2021 results. Its quarterly revenue was $6,044 million, reflecting a 124.3% year-over-year improvement, while its revenue of $18.64 billion in 2021 was up 69% from 2020.
Currently, EOG has a Zacks ranking of 2. It has a long-term earnings growth rate of 30.4%. Its earnings estimates for 2022 have improved by 37.1% over the past 60 days.
Marathon Oil: It is a major oil and natural gas exploration and production company with operations in the United States and Africa. In February 2022, the company announced its fourth quarter 2021 adjusted EPS of 77 cents, which improved significantly from a loss of 12 cents suffered in the fourth quarter 2020.
MRO currently sports a No. 1 Zacks rank. It generated a four-quarter earnings surprise of 37.39% on average. The consensus revenue estimate for 2022 has improved by 51% 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 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
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 step in at any time.
This company could rival or surpass other recent Zacks stocks that 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.