Buy These 5 Low Leverage Stocks to Protect Your Investments – December 22, 2021
Investors often opt for stocks with a solid growth history, but lack their leverage, which can be detrimental to their future growth if it is exorbitant. So if safe investing is your goal then go for low leverage stocks like Boise Cascade (Bcc – Free report), Phototronic (PLAB – Free report), House street (HMST – Free report), DAQO New Energy (QD – Free report) and EPAM systems (EPAM – Free report).
For those unfamiliar with the term, leverage refers to the use of exogenous funds by companies to carry out and grow their operations. Now companies can obtain these exogenous funds either through equity financing or debt financing.
Statistically, debt financing is preferred over equity capital because of its easy and cheap availability.
However, debt financing has its share of drawbacks. In particular, it is only desirable as long as it successfully generates a rate of return greater than the interest rate. So, to avoid huge losses in your portfolio, you should always avoid companies that resort to exorbitant debt financing.
Therefore, the crux of safe investing lies in choosing a company that is not overburdened with debt, as debt-free stocks are almost impossible to find.
To identify these stocks, historically several leverage ratios have been developed to measure the amount of debt of a company and the debt ratio is one of the most common ratios.
Debt / Equity Analysis
Debt ratio = Total liabilities / Equity
This measure is a liquidity ratio that indicates the amount of financial risk borne by a business. A business with a lower debt ratio shows improved creditworthiness for a business.
With the entire third quarter earnings season behind us, investors should watch out for stocks that have shown strong earnings growth in the recent past. But if a stock has a high debt ratio, during an economic downturn, its so-called booming earnings image could turn into a nightmare.
The winning strategy
Considering the aforementioned factors, it is prudent to choose stocks with a low leverage ratio to ensure stable returns.
However, an investment strategy based solely on the debt ratio might not achieve the desired result. To choose stocks that have the potential to provide you with stable returns, we have broadened our selection criteria to include other factors.
Here are the other parameters:
Debt / Equity below the X-Industry median: Equities less indebted than their peers in the sector.
Current price greater than or equal to 10: Stocks should trade at a minimum of $ 10 or more.
Average volume over 20 days greater than or equal to 50,000: A substantial trading volume ensures that the stock is easily tradable.
Percentage change in F (0) / F (-1) BPA greater than the X-Industry median: Profit growth adds to optimism, leading to an appreciation in the price of a stock.
VGM score of A or B: Our research shows that stocks with a VGM score of A or B, when combined with a Zacks # 1 (strong buy) or 2 (buy), offer the best upside potential.
Estimated EPS growth over one year F (1) / F (0) greater than 5: This shows earnings growth expectations
Zacks Rank # 1 or 2: Regardless of market conditions, stocks with a Zacks # 1 (strong buy) or 2 (buy) rank have a proven history of success.
Excluding stocks that have a negative or zero debt ratio, here we present our five picks from the 29 stocks that managed to make it to the screen.
Boise Cascade: It operates as a manufacturer of wood products and distributor of building materials, primarily in the United States and Canada. The company manufactures engineered wood products, plywood, lumber and particle board, and distributes wood products. BCC recently announced the construction of a 10,000 square foot warehouse in Ohio, which will expand its distribution network in the United States.
Boise Cascade has achieved a surprise profit of 45.46%, on average, over the past four quarters and currently sports a Zacks Rank # 1. Its long-term profit growth rate is set at 2.3%.
Phototronic: It is one of the world’s leading photomask manufacturers, providing the base for manufacturing mobile devices, PCs, televisions, displays and a host of other state-of-the-art products. Last December, PLAB released its full year 2021 results, in which its revenue reflects solid 9% year-over-year growth.
Photronics currently carries a Zacks Rank # 1. The company has achieved a surprise earnings of 12.55% on average over the past four quarters. FY2022 profit estimates show a 46.1% improvement over reported FY2021 profits.
House street: It is a diversified financial services company, dedicated to real estate lending, offering deposit and investment products, cash management services, single family loans and commercial loans. HMST recently announced that its commercial banking division is expanding its commercial services to Honolulu, Hawaii.
HomeStreet posted a four-quarter profit surprise of 22.48%, on average, and carries a Zacks rank of 2. Its 2021 profit estimate implies a year-over-year improvement of 53.6%. You can see The full list of today’s Zacks # 1 Rank stocks here.
DAQO New Energy: It is engaged in the manufacture and sale of high quality polysilicon to manufacturers of photovoltaic products. The polysilicon is then processed into ingots, wafers, cells and modules for solar energy solutions. DAQO New Energy’s highly efficient and technically advanced manufacturing plant in Xinjiang, China currently has an annual polysilicon production capacity of 70,000 metric tons.
Currently, DAQO New Energy has a Zacks ranking of 1. It generated a profit surprise of 4.86% on average over the four quarters. Its profit estimate for 2021 suggests a year-over-year improvement of 615.7%.
EPAM systems: It is well known for its software engineering and computer consulting services. Last December, EPAM Systems acquired Optiva Media, a niche professional services company that provides product and digital development services to leading media companies.
EPAM Systems currently holds a Zacks Rank # 2 and delivered a profit surprise of 7.21% on average over the four quarters. His estimate of the long-term profit growth rate is set at 28%.
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Disclosure: Officers, directors and / or employees of Zacks Investment Research may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document. An affiliated investment advisory firm may own or have sold securities short and / or hold long and / or short positions in options mentioned in this document.
Disclosure: Information on the performance of Zacks’ portfolios and strategies can be found at: https://www.zacks.com/performance.