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5 Low-Leverage Stocks to Buy Amid Mixed Investor Sentiments
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Major U.S. stock indices witnessed turmoil on Jan 5, ending with a marginal rise. This was most likely due to mixed sentiments among investors about the latest macroeconomic data, which offered conflicting perspectives on the timing of potential interest rate cuts.
In such a situation, an investor might not feel confident enough 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 Live Oak Bancshares (LOB - Free Report) , Marriott International (MAR - Free Report) , Cardinal Health (CAH - Free Report) , Fabrinet (FN - Free Report) and Wingstop (WING - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge 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.
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.
The equity market can be volatile at times, and, as an investor, if you don’t want to lose big time, we suggest you invest in stocks that 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 fourth-quarter earnings season knocking on the doors, 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 13 stocks that made it through the screen.
Live Oak Bancshares: It is the parent and registered bank holding company of Live Oak Banking Company, which offers an online platform for small business lending. On Nov 20, 2023, it was announced that Live Oak Bank had been named the most active SBA 7(a) lender by dollar amount by the U.S. Small Business Administration for the sixth year in a row.
LOB delivered an earnings surprise of 79.59% in the last reported quarter. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for fourth-quarter 2023 sales suggests a 14.1% improvement from the fourth-quarter 2022 reported figure.
Marriott International: The company is a leading worldwide hospitality company focused on lodging management and franchising. On Nov 9, 2023, Marriott International announced that its board of directors increased the authorization to repurchase the company's Class A common stock by an additional 25 million shares, which are in addition to the approximately 7.3 million shares that were available as of Oct 31, 2023, for repurchase under prior authorizations. This reflects the company’s solid cash position.
MAR currently carries a Zacks Rank #2. The company holds a solid long-term earnings growth rate of 17.4%. The Zacks Consensus Estimate for 2023 earnings suggests a 15.2% improvement year over year.
Cardinal Health: It is a drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. On Nov 9, 2023, Cardinal Health announced the U.S. launch of its SmartGown EDGE Breathable Surgical Gown with ASSIST Instrument Pockets, created to provide surgical teams safe and convenient instrument access in the operating room. This launch should bolster Cardinal Health’s footprint in the medical equipment industry.
CAH currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 15.3%. The Zacks Consensus Estimate for CAH’s fiscal 2024 sales indicates an improvement of 13.9% from the fiscal 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Fabrinet: It provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems, industrial lasers and sensors. On Nov 6, 2023, Fabrinet announced its financial results for first-quarter fiscal 2024. Its fiscal first quarter revenues of $685.5 million improved a solid 4.6% from the prior year quarter’s reported figure.
FN currently carries a Zacks Rank #2. The company currently holds an average four-quarter earnings surprise of 3.37%. The Zacks Consensus Estimate for FN’s fiscal 2024 sales suggests a 10% improvement from the fiscal 2023 reported figure.
Wingstop: It franchises and operates restaurants. On Nov 1, 2023, the company announced financial results for fiscal third-quarter 2023. Its system-wide sales increased 26.5% to $885 million.
WING currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 21.8%. The Zacks Consensus Estimate for WING’s fiscal 2024 sales suggests a 26.3% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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.
Image: Bigstock
5 Low-Leverage Stocks to Buy Amid Mixed Investor Sentiments
Major U.S. stock indices witnessed turmoil on Jan 5, ending with a marginal rise. This was most likely due to mixed sentiments among investors about the latest macroeconomic data, which offered conflicting perspectives on the timing of potential interest rate cuts.
In such a situation, an investor might not feel confident enough 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 Live Oak Bancshares (LOB - Free Report) , Marriott International (MAR - Free Report) , Cardinal Health (CAH - Free Report) , Fabrinet (FN - Free Report) and Wingstop (WING - Free Report) , which bear low leverage. Choosing them can shield investors from incurring huge 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.
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.
The equity market can be volatile at times, and, as an investor, if you don’t want to lose big time, we suggest you invest in stocks that 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 fourth-quarter earnings season knocking on the doors, 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 13 stocks that made it through the screen.
Live Oak Bancshares: It is the parent and registered bank holding company of Live Oak Banking Company, which offers an online platform for small business lending. On Nov 20, 2023, it was announced that Live Oak Bank had been named the most active SBA 7(a) lender by dollar amount by the U.S. Small Business Administration for the sixth year in a row.
LOB delivered an earnings surprise of 79.59% in the last reported quarter. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for fourth-quarter 2023 sales suggests a 14.1% improvement from the fourth-quarter 2022 reported figure.
Marriott International: The company is a leading worldwide hospitality company focused on lodging management and franchising. On Nov 9, 2023, Marriott International announced that its board of directors increased the authorization to repurchase the company's Class A common stock by an additional 25 million shares, which are in addition to the approximately 7.3 million shares that were available as of Oct 31, 2023, for repurchase under prior authorizations. This reflects the company’s solid cash position.
MAR currently carries a Zacks Rank #2. The company holds a solid long-term earnings growth rate of 17.4%. The Zacks Consensus Estimate for 2023 earnings suggests a 15.2% improvement year over year.
Cardinal Health: It is a drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. On Nov 9, 2023, Cardinal Health announced the U.S. launch of its SmartGown EDGE Breathable Surgical Gown with ASSIST Instrument Pockets, created to provide surgical teams safe and convenient instrument access in the operating room. This launch should bolster Cardinal Health’s footprint in the medical equipment industry.
CAH currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 15.3%. The Zacks Consensus Estimate for CAH’s fiscal 2024 sales indicates an improvement of 13.9% from the fiscal 2023 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Fabrinet: It provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems, industrial lasers and sensors. On Nov 6, 2023, Fabrinet announced its financial results for first-quarter fiscal 2024. Its fiscal first quarter revenues of $685.5 million improved a solid 4.6% from the prior year quarter’s reported figure.
FN currently carries a Zacks Rank #2. The company currently holds an average four-quarter earnings surprise of 3.37%. The Zacks Consensus Estimate for FN’s fiscal 2024 sales suggests a 10% improvement from the fiscal 2023 reported figure.
Wingstop: It franchises and operates restaurants. On Nov 1, 2023, the company announced financial results for fiscal third-quarter 2023. Its system-wide sales increased 26.5% to $885 million.
WING currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 21.8%. The Zacks Consensus Estimate for WING’s fiscal 2024 sales suggests a 26.3% improvement from the 2022 reported figure.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
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.