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5 Low-Leverage Stocks to Buy as Inflation Data Entices Investors
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The majority of U.S. stock indices bounced back to the green zone on Dec. 20, after suffering from heavy sell-offs in the earlier part of last week, as investors cheered lower-than-expected inflation data. Notably, America’s latest Personal Consumption Expenditures (PCE) index data showed price increases decelerating in November from October and were also lower than the market’s expectation.
In such a situation, an investor might rush to invest in the stock market. However, keeping in mind the volatile situation of the world economy lately, it is advisable to choose stocks that come with low leverage, thereby carrying less risk during periods of uncertainty. To this end, we recommend stocks like Fox Corp. (FOX - Free Report) , Comfort Systems USA (FIX - Free Report) , REV Group (REVG - Free Report) , Freshpet Inc. (FRPT - Free Report) and Sterling Infrastructure Inc. (STRL - Free Report) . These stocks bear low leverage and, therefore, should be a safer option for investors if they don’t want to lose big in times of market turmoil.
Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.
What’s the Significance of Low-Leverage Stocks?
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 excessive 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. 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 third-quarter earnings season 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 factors above, 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 15 stocks that made it through the screen.
FOX: It produces and distributes news, sports and entertainment content. On Nov. 4, 2024, Fox Corp. released its first-quarter fiscal 2025 results. The company reported revenues of $3.56 billion, which reflected an increase of 11% year over year. Adjusted earnings per share rose 33%.
The company boasts a long-term earnings growth rate of 7.1%. The Zacks Consensus Estimate for FOX’s fiscal 2025 sales suggests a 6.7% improvement from the fiscal 2024 actuals. It currently has a Zacks Rank #2.
Comfort Systems: It is a provider of comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services. On Oct. 24, 2024, Comfort Systems reported its third-quarter 2024 results. Its revenues improved 31.5% year over year to $1.81 billion, while earnings grew 40% in the third quarter.
The Zacks Consensus Estimate for FIX’s 2024 earnings suggests a 59.7% improvement from the 2023 reported number. The Zacks Consensus Estimate for its 2024 sales suggests a 32.8% improvement from the 2023 reported number. It currently carries a Zacks Rank #2.
REV Group: It designs, manufactures and distributes specialty vehicles, and related aftermarket parts and services. On Dec. 11, 2024, REV Group announced its fourth-quarter and full-year fiscal 2024 results. The company’s fiscal fourth quarter net income came in at 80 cents per share, up from 50 cents recorded in the prior fiscal’s fourth quarter. REV also increased its quarterly cash dividend by 20%.
It delivered a four-quarter average earnings surprise of 57.04%. The Zacks Consensus Estimate for REVG’s fiscal 2025 sales implies an improvement of 7.6% from the fiscal 2024 actuals. It currently sports a Zacks Rank #1.
Freshpet: It manufactures and markets natural fresh foods, refrigerated meals and treats for dogs and cats in the United States and Canada. On Nov 4, 2024, Freshpet announced its third-quarter 2024 results. Its sales grew 26.3% year over to $253.4 million in the third quarter. FRPT’s net income of $11.9 million for the third quarter of 2024 improved from a net loss of $7.2 million in the prior year period.
It delivered a four-quarter average earnings surprise of 144.50%. The Zacks Consensus Estimate for FRPT’s 2024 sales implies an improvement of 27.2% from the 2023 actuals. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sterling Infrastructure: It is one of the largest specialty site development companies serving large, blue-chip customers in the e-commerce, data center, distribution center, warehousing, and energy sectors. On Nov 6, 2024, the company released its third-quarter 2024 results. The company’s third-quarter revenues of $593.7 million reflected a year-over-year improvement of 6%, while earnings of $1.97 per share grew 56%.
STRL currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 15%. The Zacks Consensus Estimate for STRL’s 2024 sales suggests a 9% improvement from the 2023 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 trading. Further, you can also create your 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.
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5 Low-Leverage Stocks to Buy as Inflation Data Entices Investors
The majority of U.S. stock indices bounced back to the green zone on Dec. 20, after suffering from heavy sell-offs in the earlier part of last week, as investors cheered lower-than-expected inflation data. Notably, America’s latest Personal Consumption Expenditures (PCE) index data showed price increases decelerating in November from October and were also lower than the market’s expectation.
In such a situation, an investor might rush to invest in the stock market. However, keeping in mind the volatile situation of the world economy lately, it is advisable to choose stocks that come with low leverage, thereby carrying less risk during periods of uncertainty. To this end, we recommend stocks like Fox Corp. (FOX - Free Report) , Comfort Systems USA (FIX - Free Report) , REV Group (REVG - Free Report) , Freshpet Inc. (FRPT - Free Report) and Sterling Infrastructure Inc. (STRL - Free Report) . These stocks bear low leverage and, therefore, should be a safer option for investors if they don’t want to lose big in times of market turmoil.
Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.
What’s the Significance of Low-Leverage Stocks?
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 excessive 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. 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 third-quarter earnings season 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 factors above, 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 15 stocks that made it through the screen.
FOX: It produces and distributes news, sports and entertainment content. On Nov. 4, 2024, Fox Corp. released its first-quarter fiscal 2025 results. The company reported revenues of $3.56 billion, which reflected an increase of 11% year over year. Adjusted earnings per share rose 33%.
The company boasts a long-term earnings growth rate of 7.1%. The Zacks Consensus Estimate for FOX’s fiscal 2025 sales suggests a 6.7% improvement from the fiscal 2024 actuals. It currently has a Zacks Rank #2.
Comfort Systems: It is a provider of comprehensive heating, ventilation and air conditioning installation, maintenance, repair and replacement services. On Oct. 24, 2024, Comfort Systems reported its third-quarter 2024 results. Its revenues improved 31.5% year over year to $1.81 billion, while earnings grew 40% in the third quarter.
The Zacks Consensus Estimate for FIX’s 2024 earnings suggests a 59.7% improvement from the 2023 reported number. The Zacks Consensus Estimate for its 2024 sales suggests a 32.8% improvement from the 2023 reported number. It currently carries a Zacks Rank #2.
REV Group: It designs, manufactures and distributes specialty vehicles, and related aftermarket parts and services. On Dec. 11, 2024, REV Group announced its fourth-quarter and full-year fiscal 2024 results. The company’s fiscal fourth quarter net income came in at 80 cents per share, up from 50 cents recorded in the prior fiscal’s fourth quarter. REV also increased its quarterly cash dividend by 20%.
It delivered a four-quarter average earnings surprise of 57.04%. The Zacks Consensus Estimate for REVG’s fiscal 2025 sales implies an improvement of 7.6% from the fiscal 2024 actuals. It currently sports a Zacks Rank #1.
Freshpet: It manufactures and markets natural fresh foods, refrigerated meals and treats for dogs and cats in the United States and Canada. On Nov 4, 2024, Freshpet announced its third-quarter 2024 results. Its sales grew 26.3% year over to $253.4 million in the third quarter. FRPT’s net income of $11.9 million for the third quarter of 2024 improved from a net loss of $7.2 million in the prior year period.
It delivered a four-quarter average earnings surprise of 144.50%. The Zacks Consensus Estimate for FRPT’s 2024 sales implies an improvement of 27.2% from the 2023 actuals. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sterling Infrastructure: It is one of the largest specialty site development companies serving large, blue-chip customers in the e-commerce, data center, distribution center, warehousing, and energy sectors. On Nov 6, 2024, the company released its third-quarter 2024 results. The company’s third-quarter revenues of $593.7 million reflected a year-over-year improvement of 6%, while earnings of $1.97 per share grew 56%.
STRL currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 15%. The Zacks Consensus Estimate for STRL’s 2024 sales suggests a 9% improvement from the 2023 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 trading. Further, you can also create your 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.