Wall Street tumbled last Friday, primarily hit by delivery bigwig FedEx’s share plunge as management warned investors to look out for a sharp drop in package deliveries, fearing more demand slowdown in the coming months.
No doubt this spooked investors across the board who are already fearing another rate hike by the Federal Reserve to combat inflation. Nevertheless, a prudent investor may utilize this situation to buy stocks that are safe bets amid the ongoing economic turmoil. Some such stocks are Tesla TSLA, EchoStar SATS, Amalgamated Financial AMAL, Titan Machinery TITN and PBF Energy PBF. These stocks bear low leverage.
Now one might think why low leverage stocks?
For this, one should be well acquainted with what leverage is and how choosing low-leverage stocks can keep an investor away from incurring huge losses.
Basically, 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 primarily done through debt financing, although there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.
However, at times debt financing can be detrimental for a company’s prospects, especially when a company bears too much debt compared to its assets. So, one should look for stocks that are not heavily burdened with debt.
So, the next step should be how to identify such stocks that are not overburdened with debt as a debt-free stock is almost impossible to find.
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 company with a lower debt-to-equity ratio shows improved solvency for a company.
With the second-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 downturns, 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.
However, 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 (Strong Buy) or 2 (Buy) 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 30 stocks that made it through the screen.
Tesla: It is the leader in battery-powered electric car sales in the United States, owning around 60% of the market share. In August 2022, its board of directors approved a three-for-one split of Tesla’s common stock in the form of a stock dividend to make stock ownership more accessible to employees and investors.
Tesla delivered an earnings surprise of 32.17%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently. The stock boasts a long-term earnings growth rate of 31.2%.
EchoStar: It is s a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband Internet services to home and small office customers. EchoStar recently announced that its Hughes Network Systems has started rolling out a new low-latency satellite Internet offering to consumers in select U.S. markets. Available as HughesNet Fusion plans, the multipath offering seamlessly blends Geostationary satellite and wireless technologies into a fast and responsive satellite internet experience.
EchoStar currently carries a Zacks Rank #2. The company delivered an earnings surprise of 15.63% in the last reported quarter. The Zacks Consensus Estimate for SATS’ 2022 earnings implies an improvement of 171.8% from the 2021 reported figure.
Amalgamated Financial: It provides commercial banking and trust services nationally and offers products and services to both commercial and retail customers. In July 2022, the company announced its second-quarter results. Its deposits increased 4.6% on a linked quarter basis.
Amalgamated Financial came up with a four-quarter earnings surprise of 22.60%, on average, and carries a Zacks Rank of 2. The Zacks Consensus Estimate for AMAL’s 2022 earnings implies an improvement of 42.4% from the 2021 reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Titan Machinery: It is a multi-unit business, which owns and operates a network of full-service agricultural and construction equipment stores in the United States and Europe. TITN’s fiscal 2023 second-quarter revenues grew 31.5% year over year, while adjusted earnings improved 96.4%.
Currently, Titan Machinery sports a Zacks Rank of 1. It delivered a four-quarter earnings surprise of 59.48%, on average. Its fiscal 2023 earnings estimate reflects an annual improvement of 18%.
PBF Energy: It is a leading refiner of crude. Through five oil refineries and associated infrastructure in the United States, the company provides end products that comprise heating oil, transportation fuels, lubricants and many related products. In July 2022, PBF Energy reported its second-quarter 2022 results. The company reduced consolidated debt by more than $2.2 billion during the reported quarter.
PBF Energy currently sports a Zacks Rank #1 and delivered a four-quarter earnings surprise of 77.97%, on average. The Zacks Consensus Estimate for PBF’s 2022 earnings indicates an improvement of 898.4% from the 2021 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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EchoStar Corporation (SATS) : Free Stock Analysis Report
Tesla, Inc. (TSLA) : Free Stock Analysis Report
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Amalgamated Financial Corp. (AMAL) : Free Stock Analysis Report
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