Buy These 5 Low-Leverage Stocks Amid Market Volatility

The sudden air strike that U.S. President Trump launched on Syria last week took the global stock market by surprise and dragged it down. Escalating geopolitical concerns in the wake of the U.S. decision to redirect warships toward the Korean peninsula, following a provocative missile test by North Korea, also caused an upheaval in the equity market.

However, the recent uptick in oil prices boosted the energy sector, which in turn induced positive trading sentiment on Monday. This helped U.S. stocks to overcome the near-term hurdles and witness an upside.

Meanwhile, Federal Reserve chairperson, Janet Yellen claimed that the U.S. economy is on a “pretty healthy” path, thanks to declining unemployment rate and growing consumer spending. However, she expressed concerns regarding low productivity growth that has been significantly affecting economic growth.

Amid such widespread uncertainty, investors often look out for stable stocks. Considering the fact that debt ridden companies are more vulnerable at times of volatility, it is safe to avoid these, even if they record strong earnings growth.

Herein lies the significance of financial leverage ratio, which helps one eliminate leveraged stocks or the ones that carry too much debt. One of the most popular leverage ratios is the debt-to-equity ratio.

Analyzing Debt-to-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 implies a more financially stable business, thereby making it a more worthy investment opportunity.

With the first–quarter earnings cycle just around the corner, we urge investors to go for low leverage stocks instead of targeting growth stocks. After all, low leverage stocks are financially more secure and immune to market upheavels.

The Winning Strategy

Considering the aforementioned discussion, it is imperative for a sensible investor to choose stocks that have a low debt-to-equity ratio.

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.

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.

Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.

Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.

Zacks Investment Research

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Written By: Zacks Investment Research