5 Low Leverage Stocks Risk Averse Investors Can Buy – February 22, 2022
U.S. stock futures rose in the early hours of February 21, even as the U.S. stock market was closed due to President’s Day, thanks to a rumor of a summit on Ukraine between America and Ukraine. However, this gain was momentary, as it was quickly confirmed that no such top was taking place.
Such an event shows how volatile the stock market can sometimes be and as an investor, if you don’t want to waste a lot of time, we suggest you invest in stocks like Valero Energy (VLO – free report), STMicroelectronics (STM – free report), Western channel partners (WE S – free report), Chevron (CLC – free report) and Atmospheric energy (ATO – Free report) which have a low leverage and are therefore less risky.
Now, it must be understood that you cannot totally avoid risk by investing in the stock market, but of course you can minimize it and along comes the concept of choosing a low leverage stock. But first, one must be aware of what leverage means.
Leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. Although this borrowing can be through equity or debt financing, statistically, it has been observed that debt financing is preferred over equity by the majority of companies.
This preference is likely due to the cheap and easy availability of debt versus equity financing.
However, debt financing can sometimes be detrimental to a company’s prospects, especially when a company is too leveraged relative to its assets. So look for stocks that aren’t heavily leveraged.
So, the next step should be how to identify those stocks that are not burdened with debt, because a debt-free stock is almost impossible to find.
To identify these actions, several leverage ratios have historically been developed to measure the amount of debt a company has and the debt-to-equity ratio is one of the most common ratios.
Debt Ratio = Total Liabilities/Equity
This measure is a liquidity ratio that indicates the amount of financial risk that a company bears. A company with a lower debt ratio shows improved creditworthiness for a company.
With the fourth quarter earnings cycle underway, investors should look to stocks that have shown strong earnings growth over the past few years. But if a stock has a high leverage ratio, in an economic downturn its so-called booming earnings picture could turn into a nightmare.
The winning strategy
Considering the above factors, it is prudent to choose stocks with a low leverage ratio to ensure regular returns.
However, an investment strategy based solely on the debt ratio might not yield the desired result. To choose stocks that have the potential to give you stable returns, we’ve expanded our selection criteria to include other factors.
Here are the other settings:
Debt/equity below X-Industry median: Stocks less leveraged than their sector counterparts.
Current price greater than or equal to 10: Stocks must trade at a minimum of $10 or more.
Average volume over 20 days greater than or equal to 50000: A substantial trading volume ensures that the security is easily tradable.
Percentage change in EPS F(0)/F(-1) above industry median X: Earnings growth adds to optimism, causing a stock price to appreciate.
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 most upside potential.
Estimated one-year EPS growth F(1)/F(0) greater than 5: This shows earnings growth forecasts
Zacks Rank #1 or 2: Regardless of market conditions, stocks with a Zacks rank of #1 (strong buy) or 2 (buy) have a proven history of success.
Excluding stocks that have a negative or zero leverage ratio, here we present our five picks from the 26 stocks that crossed the screen.
Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. VLO reduced its long-term debt by approximately $750 million in February through its previously announced debt reduction and refinancing operations.
Valero Energy has posted a surprise profit of 75.74%, on average, over the past four quarters and currently sports a Zacks No. 1 ranking. Zacks consensus estimate for 2022 revenue rose 1.7 % in the last 60 days.
STMicroelectronics: It is an independent global semiconductor company, which designs, develops, manufactures and markets a wide range of semiconductor integrated circuits and discrete devices. STM recently unveiled automotive microcontrollers (MCUs) optimized for electric vehicles and centralized electronic architectures (domain and zonal).
STMicroelectronics currently holds a Zacks #1 rank. The company has posted a surprise profit of 7.29% over the past four quarters, on average. The STM has a long-term earnings growth rate of 5%.
Western channel partners: It operates, acquires and develops intermediate energy assets. WES recently declared a quarterly cash distribution of 32.7 cents per unit for the fourth quarter of 2021, up 1.3% from the previous quarter’s distribution
Western Midstream has a Zacks rank of 2. The Zacks consensus estimate for 2022 earnings has risen 4.7% over the past 60 days. You can see the full list of today’s Zacks #1 Rank stocks here.
Chevron: It is one of the largest publicly traded oil and gas companies in the world, with operations that span almost every corner of the globe. In January 2022, CVX declared a quarterly dividend of $1.42 per share, an increase of 6%.
Currently, Chevron has a Zacks rank of 2. It has generated a four-quarter earnings surprise of 6.28% on average. Its earnings estimate for 2022 has improved by 13.9% over the past 60 days.
Atmospheric energy: It carries out regulated natural gas distribution and storage activities. ATOS announced its results for the first fiscal quarter of 2022 on February 8, 2022. Its profit was $1.86 for the first fiscal quarter.
Atmos Energy currently holds a No. 2 Zacks rank and has posted a four-quarter earnings surprise of 4.40% on average. Its long-term earnings growth estimate is 7.3%.
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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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.