Wall Street has been going through quite an upheaval in the last few trading sessions with fears of the impact of inflation on the overall economic condition looming large among investors. The ongoing Russia-Ukraine conflict along with rising COVID cases in China is also playing its part in spooking investors.
Amid such uncertainties, investors might refrain from investing in stocks. However, that is not the right decision if you want to make profit in the share market. Instead, one may select less risky stocks like Axcelis Technologies ACLS, Valero Energy VLO, MarineMax HZO, Exxon Mobil XOM and Marathon Oil MRO that bear low leverage to avoid losing it all in the face of a sudden crisis.
Now, this might lead to the question that what is the benefit of choosing low leverage stocks. To answer this, we must first be aware of what leverage is.
Notably, 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 avert companies that resort to exorbitant debt financing.
Therefore, 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.
Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks, which bear low leverage and are hence are 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.
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 first-quarter earnings cycle almost in its last lap, 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 31 stocks that made it through the screen.
Axcelis Technologies: It is a leading producer of ion implantation equipment used in the fabrication of semiconductors. In May 2022, Axcelis announced its first-quarter 2022 results. The company reported first-quarter revenues of $203.6 million, down 1% year over year.
Axcelis delivered an earnings surprise of 23.48%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 10.3% in the past 60 days.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In April, VLO announced its first-quarter 2022 results. The company reported adjusted earnings of $2.31 per share for the first quarter of 2022 compared with $1.64 generated in the prior-year quarter.
Valero Energy currently carries a Zacks Rank #2. The company delivered an earnings surprise of 84.26% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 earnings has moved up 59% in the past 60 days.
MarineMax: It is the world’s largest recreational boat and yacht retailer. In April, the company reported its second quarter of fiscal 2022 results. Its revenues increased 17% year over year to a record $610.1 million in the fiscal second quarter.
HZO sports a Zacks Rank #1 and delivered an earnings surprise of 32.75%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings has moved up 4.8% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Exxon Mobil: It is one of the world’s largest publicly traded international oil and gas companies. In May 2022, ExxonMobil reached an agreement to sell its Romanian upstream affiliate, ExxonMobil Exploration and Production Romania, to Romgaz for more than $1 billion.
Currently, Exxon has a Zacks Rank of 2. It boasts a long-term earnings growth rate of 20.40%. The Zacks Consensus Estimate for 2022 earnings has improved 37.1% over the past 60 days.
Marathon Oil: It is a leading oil and natural gas exploration and production company with operations in the United States and Africa. In May 2022, Marathon Oil reported first-quarter 2022 adjusted net income of $1.02 per share.
MRO currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 23.03%, on average. The consensus estimate for 2022 earnings has improved 54.9% over the past 60 days.
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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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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
Axcelis Technologies, Inc. (ACLS) : Free Stock Analysis Report
MarineMax, Inc. (HZO) : Free Stock Analysis Report
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