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5 Low-Leverage Stocks to Buy as Possibility of Recession Rises
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Wall Street started this week on a dismal note, with fears of a possible recession looming large among investors as the Federal Reserve scrambled to get inflation under control.
No doubt investors are shaky as a further drop in share prices may result in huge losses. However, experts suggest that this is the right time to buy some stocks as their prices are low and they are thus affordable. Stocks like Packaging Corporation of America (PKG - Free Report) , Valero Energy (VLO - Free Report) , Chubb Ltd (CB - Free Report) , Host Hotels & Resorts (HST - Free Report) and Ryder Systems (R - Free Report) bear low leverage and therefore can shield investors from incurring losses.
Now, before selecting low leverage stocks one must be aware of 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.
Analyzing Debt/Equity
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 behind us, 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 32 stocks that made it through the screen.
Packaging Corporation: It is the third-largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. In May 2022, Packaging Corporation revealed that it intends to increase the quarterly cash dividend on its common stock to an annual payout of $5.00 per share from $4.00 per share, reflecting a 25% increase.
PKG delivered an earnings surprise of 19.55%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 8.2% in the past 60 days.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In June 2022, Valero declared that the company has reduced its debt by approximately $300 million through the acquisition of $300 million of 4% Gulf Opportunity Zone Revenue Bonds Series 2010.
VLO currently sports a Zacks Rank #1. The company delivered an earnings surprise of 84.26% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 87.4% in the past 60 days.
Chubb: It is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer, based on market capitalization of $56.9 billion. In May 2022, the company’s shareholders approved a 3.75% increase in its dividend to $3.32 per share annually from $3.20 per share. This marked the twenty-ninth consecutive annual increase in the company's dividend.
CB carries a Zacks Rank #2 and delivered an earnings surprise of 13.45%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 2.7% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Host Hotels & Resorts: It is one of the leading lodging real estate investment trusts (REITs), which engages in the ownership, acquisition, and redevelopment of luxury and upper-upscale hotels in the United States and abroad. In May 2022, the company announced a 100% increment in its quarterly cash dividend to 6 cents.
Currently, HST has a Zacks Rank of 2 and delivered an earnings surprise of 93.53%, on average, in the trailing four quarters The Zacks Consensus Estimate for 2022 earnings has improved 24.2% over the past 60 days.
Ryder Systems: It is recognized as one of the world's largest providers of integrated logistics and transportation solutions. In June 2022, the company at its Investor Day increased its second-quarter as well as full-year 2022 GAAP EPS forecast.
R currently has a Zacks Rank #2. It delivered a four-quarter earnings surprise of 48.24%, on average. The consensus estimate for 2022 earnings has improved 22.9% over the past 60 days.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
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5 Low-Leverage Stocks to Buy as Possibility of Recession Rises
Wall Street started this week on a dismal note, with fears of a possible recession looming large among investors as the Federal Reserve scrambled to get inflation under control.
No doubt investors are shaky as a further drop in share prices may result in huge losses. However, experts suggest that this is the right time to buy some stocks as their prices are low and they are thus affordable. Stocks like Packaging Corporation of America (PKG - Free Report) , Valero Energy (VLO - Free Report) , Chubb Ltd (CB - Free Report) , Host Hotels & Resorts (HST - Free Report) and Ryder Systems (R - Free Report) bear low leverage and therefore can shield investors from incurring losses.
Now, before selecting low leverage stocks one must be aware of 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.
Analyzing Debt/Equity
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 behind us, 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 32 stocks that made it through the screen.
Packaging Corporation: It is the third-largest producer of containerboard products and a leading producer of uncoated freesheet paper in North America. In May 2022, Packaging Corporation revealed that it intends to increase the quarterly cash dividend on its common stock to an annual payout of $5.00 per share from $4.00 per share, reflecting a 25% increase.
PKG delivered an earnings surprise of 19.55%, on average, in the trailing four quarters. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 8.2% in the past 60 days.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In June 2022, Valero declared that the company has reduced its debt by approximately $300 million through the acquisition of $300 million of 4% Gulf Opportunity Zone Revenue Bonds Series 2010.
VLO currently sports a Zacks Rank #1. The company delivered an earnings surprise of 84.26% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 87.4% in the past 60 days.
Chubb: It is one of the world’s largest providers of property and casualty (P&C) insurance and reinsurance and the largest publicly traded P&C insurer, based on market capitalization of $56.9 billion. In May 2022, the company’s shareholders approved a 3.75% increase in its dividend to $3.32 per share annually from $3.20 per share. This marked the twenty-ninth consecutive annual increase in the company's dividend.
CB carries a Zacks Rank #2 and delivered an earnings surprise of 13.45%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 2.7% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Host Hotels & Resorts: It is one of the leading lodging real estate investment trusts (REITs), which engages in the ownership, acquisition, and redevelopment of luxury and upper-upscale hotels in the United States and abroad. In May 2022, the company announced a 100% increment in its quarterly cash dividend to 6 cents.
Currently, HST has a Zacks Rank of 2 and delivered an earnings surprise of 93.53%, on average, in the trailing four quarters The Zacks Consensus Estimate for 2022 earnings has improved 24.2% over the past 60 days.
Ryder Systems: It is recognized as one of the world's largest providers of integrated logistics and transportation solutions. In June 2022, the company at its Investor Day increased its second-quarter as well as full-year 2022 GAAP EPS forecast.
R currently has a Zacks Rank #2. It delivered a four-quarter earnings surprise of 48.24%, on average. The consensus estimate for 2022 earnings has improved 22.9% over the past 60 days.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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