The majority of U.S. stock indices ended lower on Nov. 12, as rising U.S. treasury yields posed a headwind to the equities’ rally witnessed over the past few days following the election results. The dismal performance of the bourses also reflected investors’ concern regarding U.S. inflation data, which is set to be released today.
In such a situation, an investor might not feel confident enough to invest in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Janus Henderson Group JHG, Coastal Financial CCB, Novartis NVS, Apogee Enterprises APOG and InterDigital IDCC. 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.
What’s the Significance of Low-Leverage Stocks?
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.
Analyzing Debt/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 reflects improved solvency for a company.
With the third-quarter earnings season 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 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.
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 13 stocks that made it through the screen.
Janus Henderson: It is an investment management company. It provides investment advisors for equities, fixed income, property and private equity sectors. On Oct. 31, 2024, Janus Henderson announced its third-quarter 2024 results. Its adjusted revenues improved 6.5% year over year in the reported quarter, while adjusted earnings per share rose 7.1%.
The company boasts a long-term earnings growth rate of 22.2%. The Zacks Consensus Estimate for JHG’s 2024 sales suggests an 18% improvement from the 2023 actuals. It currently sports a Zacks Rank #1.
Coastal Financial: It is a bank holding company that 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 6.4% improvement from the 2023 reported number. The Zacks Consensus Estimate for CCB’s 2024 sales suggests a 31.4% improvement from the 2023 reported number. It currently carries a Zacks Rank #2.
Novartis: It is a pharmaceutical company with experience in core therapeutic areas like cardiovascular, renal and metabolic, immunology, neuroscience and oncology across geographies like the United States, China, Germany and Japan. On Oct. 29, 2024, Novartis announced that its Scemblix (asciminib) has been granted accelerated approval by the US Food and Drug Administration (FDA) for adult patients with newly diagnosed Philadelphia chromosome-positive chronic myeloid leukemia in the chronic phase.
The company boasts a long-term earnings growth rate of 9.1%. The stock delivered a four-quarter average earnings surprise of 2.2%. NVS 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 Nov. 4, 2024, Apogee Enterprises announced the completion of the previously announced acquisition of UW Interco, LLC (“UW Solutions”), a vertically integrated manufacturer of high-performance coated substrates used in graphic arts, building products, and other applications, for $242 million in cash. The company expects the acquisition to contribute incremental net sales of approximately $30 million in fiscal 2025.
It delivered a four-quarter average earnings surprise of 19.7%. The Zacks Consensus Estimate for APOG’s fiscal 2025 earnings has improved 3.6% in the past 60 days. It currently sports a Zacks Rank #1.
InterDigital: It is a pioneer in advanced mobile technologies that enables wireless communications and capabilities. On Oct. 31, 2024, the company released its third-quarter 2024 results. The company delivered revenues of $128.7 million, which exceeded the top end of its guidance, driven by the strong performance of its consumer electronics and IoT licensing program.
IDCC currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 17.4%. The Zacks Consensus Estimate for IDCC’s 2024 sales suggests a 56.4% 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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