Major U.S. stock indices ended in the green on Oct. 28, buoyed by investors’ optimism about the projected better-than-expected results of a handful of big technology companies scheduled to report this week. The anticipated release of several important economic indicators this week, like a preliminary reading on third-quarter gross domestic product and the September personal consumption expenditure, also might have pushed the prices at the bourses.
This might encourage investors to spend on shares. 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. In this regard, we recommend stocks like Resmed RMD, Coastal Financial CCB, Kirby Corp. KEX, Apogee Enterprises APOG and Limbach LMB. 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.
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.
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 ongoing, 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.
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.
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 10 stocks that made it through the screen.
Resmed: The company holds a major position as a designer, manufacturer, as well as a distributor in the worldwide market for generators, masks, and related accessories for the treatment of sleep-disordered breathing (SDB) and other respiratory disorders. On Oct 24, 2024, Resmed announced its first-quarter fiscal 2025 results. Its revenues improved 11% year over year in the fiscal first quarter, while income from operations surged 34%.
The company boasts a long-term earnings growth rate of 13.6%. The Zacks Consensus Estimate for RMD’s fiscal 2025 sales suggests a 7.4% improvement from the fiscal 2024 reported actuals. It currently carries a Zacks Rank #2.
Coastal Financial: It is a bank holding company, which provides accounts checking, savings deposits, money market, mortgage and term loans services, as well as card facilities and Internet banking services, through its subsidiaries. On Oct 28, 2024, Coastal Financial reported its third-quarter 2024 results. Its return on average assets ("ROA") was 1.34% compared with 1.13% for the third quarter of 2023.
The Zacks Consensus Estimate for CCB’s 2024 earnings suggests a 4.6% improvement from the 2023 reported number. The Zacks Consensus Estimate for CCB’s 2024 sales suggests a 35.8% improvement from the 2023 reported number. It currently carries a Zacks Rank #2.
Kirby: It is the largest domestic tank barge operator in the United States. On Aug 1, 2024, Kirby Corp. announced its second-quarter 2024 results. Its revenues grew 6.1% year over year, while earnings surged 50.5%.
The company boasts a long-term earnings growth rate of 29.8%. The Zacks Consensus Estimate for KEX’s 2024 sales implies an increase of 6.2% from 2023 sales. KEX currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Apogee Enterprises: It is a leader in architectural products and services, providing architectural glass, aluminum framing systems and installation services for buildings as well as value-added glass and acrylic for custom picture framing and displays. On Oct. 4, 2024, Apogee Enterprises released its second-quarter fiscal 2025 results. Its adjusted earnings per share of $1.44 improved 5.9% year over year, while adjusted operating income rose 6.4%.
It boasts a four-quarter average earnings surprise of 19.7%. The Zacks Consensus Estimate for APOG’s fiscal 2025 earnings improved 4.1% in the past 60 days. It currently sports a Zacks Rank #1.
Limbach: It is a building system solution firm that engineers, constructs and services the mechanical, plumbing, air conditioning, heating, building automation, electrical and control systems. On Sept. 3, 2024, Limbach announced that it has acquired Kent Island Mechanical for an initial purchase price of $15 million. KIM is a leading service provider to facility owners who require solutions for maintaining complex building systems.
LMB currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 12%. The Zacks Consensus Estimate for LMB’s 2024 sales suggests a 1.3% improvement from the 2023 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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ResMed Inc. (RMD) : Free Stock Analysis Report
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Coastal Financial Corporation (CCB) : Free Stock Analysis Report
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