Buy These 5 Low Leverage Stocks To Keep Your Portfolio Safe
Zacks Investment Research | May 30, 2017 08:58AM ET
The U.S. stock market recovered last Friday, following a dip since May 17 when President Trump ordered the then-FBI Director James Comey to close an investigation related to former National Security Adviser Mike Flynn.
Overall, market sentiment is positive with two significant data points for the month of May expected shortly. The consumer confidence figures will be released today while the jobs report is due on Friday.
Meanwhile, this recovery in stocks coincided with Trump’s maiden foreign trip wherein the President inked a $110 billion arms deal with Saudi Arabia, promising to invest almost $400 billion in these two countries and, in turn, creating thousands of jobs for the Americans and Saudis. As a result, U.S. defense stocks reached record highs last week.
However, declining oil price in the global market as well as widespread skepticism among analysts regarding Trump’s job saving hype remain threats.
One of the investment strategies to play it safe in the current scenario is to go for stocks holding relatively less debt as highly leveraged stocks are vulnerable at times of volatility.
Using financial leverage ratio, one can easily discriminate between highly leveraged and low-leveraged stocks. 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.
The first quarter earnings cycle saw the highest level of growth in over five years. In times like these, investors tend to go for stocks exhibiting solid earnings growth, overlooking the debt on their balance sheet. To avoid any loss, we would like to urge investors to look for low-leveraged stocks that are financially more secure and immune to market upheavals.
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.
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