If you want to invest in stocks but also want to avoid unnecessary risk, choose low leverage stocks like ICICI Bank (IBN – Free report), EchoStar (SATS – Free report), Former International Republic (OR I – Free report), DAQO New Energy (QD – Free report) and Teradyne (TER – Free report).
Leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. This borrowing can be done either by equity or by borrowing.
Now, a comparative analysis shows that debt financing has historically been preferred over equity because of its easy and cheap availability.
Another advantage of debt financing is that the interest on debt is tax deductible.
Debt financing is not always desirable. In particular, debt financing becomes a threat if it does not generate a rate of return greater than the interest rate. So, while choosing stocks, a prudent investor should pay attention to a company’s debt level.
In particular, if you are a risk averse investor, go for low leverage stocks, as it is rare to find a company without debt.
In order to assert the leverage of a business, we need a metric. The debt ratio is a frequently used measure to measure the leverage effect of a business.
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 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-to-equity ratio, during an economic downturn, its so-called image of booming earnings 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 median for industry X: Equities less indebted than their sector counterparts.
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 26 stocks that made it through the screen.
ICICI Bank: It offers a wide range of banking products and financial services to businesses and individuals. Other sectors in which ICICI Bank has expanded its presence include lending to the underserved rural market and small and medium-sized enterprises (SMEs), which recorded a 32.5% year-over-year increase at the end of fiscal 2021. and 42% in the first half of fiscal 2022.
ICICI Bank has made a surprise profit of 3.90%, on average, over the past four quarters and currently holds a Zacks Rank # 2. Its long-term profit growth rate is set at 28.2%.
EchoStar: It is a global provider of satellite operations, video streaming services, broadband satellite technologies and broadband Internet services to consumers and small businesses. EchoStar is a pioneer in secure communication technologies through its business lines Hughes Network Systems and EchoStar Satellite Services.
EchoStar currently wears a Zacks Rank # 2. The company has achieved a surprise profit of 90.00% over the past four quarters, on average. Its profit estimate for 2021 shows a 632.5% improvement over reported 2020 profits.
Former International Republic: It is an insurance holding company whose subsidiaries actively market, underwrite and provide risk management services for a wide variety of coverages, mainly in the areas of general insurance and insurance. securities. Old Republic International is one of the 50 largest shareholder-owned insurance companies in the country. This year marks the 80th year of regular and uninterrupted cash dividend payments.
Old Republic International posted a four-quarter profit surprise of 54.63%, on average, and carries a Zacks ranking of 2. Its 2021 profit estimate implies a 29.5% improvement over published 2020 profits. . 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’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 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 615.7% improvement over reported 2020 profits.
Teradyne: It is a leading supplier of automated test equipment, with particular emphasis on the semiconductor testing market. Teradyne’s adjusted third quarter 2021 profit of $ 1.59 increased 35% year over year.
Teradyne currently holds a Rank 2 of Zacks and had a surprise four-quarter profit of 9.32%, on average. Its estimate of the long-term profit growth rate is set at 19.9%.
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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.