Wall Street stocks closed lower on May 9 as investors remained concerned about the scheduled meeting between U.S. political leaders related to the debt ceiling and its outcome. On top of that inflation woes are still looming large on the U.S. stock market.
Considering the current situation, an investor might not feel encouraged to invest in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like e.l.f. Beauty ELF, Host Hotels & Resorts HST, Alaska Air Group ALK, Addus HomeCare ADUS and International Seaways INSW, which bear low leverage and therefore can shield investors from incurring losses in times of crisis.
Now, before selecting 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 denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing. But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
However, debt financing has its share of drawbacks. Particularly, it is desirable only as long as it successfully generates a higher rate of return compared to the interest rate. So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to exorbitant debt financing.
Therefore, the crux of safe investment lies in choosing a company that is not burdened with debt, as a debt-free stock is almost impossible to find.
Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks, which bear low leverage and are hence less risky.
To identify such stocks, historically several leverage ratios have been developed to measure the amount of debt a company bears and the debt-to-equity ratio is one of the most common ratios.
Debt-to-Equity Ratio = Total Liabilities/Shareholders’ Equity
This metric is a liquidity ratio that indicates the amount of financial risk a company bears. A lower debt-to-equity ratio reflects improved solvency for a company.
With the first-quarter earnings cycle almost in its last lap, investors must be eyeing stocks that have exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio in times of economic downturn, its so-called booming earnings picture might turn into a nightmare.
The Winning Strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
Yet, an investment strategy based solely on the debt-to-equity ratio might not fetch the desired outcome. To choose stocks that have the potential to give you steady returns, we have expanded our screening criteria to include some other factors.
Here are the other parameters:
Debt/Equity less than X-Industry Median: Stocks that are less leveraged than their industry peers.
Current Price greater than or equal to 10: The stocks must be trading at a minimum of $10 or above.
Average 20-day Volume greater than or equal to 50000: A substantial trading volume ensures that the stock is easily tradable.
Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth adds to optimism, leading to a stock’s price appreciation.
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 best upside potential.
Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.
Zacks Rank #1 or 2: Irrespective of market conditions, stocks with a Zacks Rank #1 or 2 have a proven history of success.
Excluding stocks that have a negative or a zero debt-to-equity ratio, here we present our five picks out of the 10 stocks that made it through the screen.
e.l.f. Beauty: It operates as a cosmetic company. On Apr 27, 2023, the company launched its new digital series, "Vanity Table Talk.", which is the social-first show. It is a playful mashup of popular formats, including the late-night talk show and the TikTok-native Get Ready With Me (GRWM). Much like TikTok’s viral GRWM format, guests will sit solo at e.l.f.’s gorgeous vanity and apply products while storytelling and reacting to questions flying in from off-camera.
ELF delivered an earnings surprise of 104.99%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2023 earnings implies a 70.3% improvement from the fiscal 2022 reported figure.
Host Hotels & Resorts: It is one of the leading lodging real estate investment trusts (REITs), engaged in the ownership, acquisition, and redevelopment of luxury and upper-upscale hotels in the United States and abroad. In May 2023, the company released its first-quarter 2023 results, wherein its comparable hotel RevPAR increased 31% from the first quarter of 2022, exceeding the top end of its guidance by four percentage points.
HST currently has a Zacks Rank #2. The company delivered an earnings surprise of 14.58% in the last reported quarter. The Zacks Consensus Estimate for 2023 sales suggests a 6.7% improvement year over year.
Alaska Air Group: It is an airline company, which, together with its partner regional carriers, serves more than 120 cities across North America. In April 2023, the company unveiled its inaugural transpacific service between Taipei and Los Angeles. Alaska is STARLUX's first airline partner.
ALK carries a Zacks Rank #2 and holds a long-term earnings growth rate of 24.2%. The Zacks Consensus Estimate for 2023 sales indicates an 8.8% improvement from the 2022 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Addus Homecare: It is a comprehensive provider of a broad range of social and medical services in the home. The company's services include personal care and assistance with activities of daily living, skilled nursing and rehabilitative therapies, and adult day care. In May 2023, the company announced its financial results for the first quarter of 2023. Its net service revenues were $251.6 million, an 11% increase from the first quarter of 2022.
ADUS currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 6.10%, on average. The Zacks Consensus Estimate for 2023 sales suggests an 8.3% improvement from the 2022 reported figure.
International Seaways: It is a tanker company, which provides energy transportation services for crude oil and petroleum products. In May 2023, the company released its first-quarter 2023 results, wherein its shipping revenues of $287.1 million improved a solid 182.9% from the first quarter of 2022.
INSW currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 8.14%, on average. The Zacks Consensus Estimate for 2023 sales suggests an 11.7% improvement from the 2022 reported 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 options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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