Worried About Volatility? Buy These 5 Low Leverage Stocks

The U.S. stock market suffered a setback yesterday as weak earnings reports from some of the retail bellwethers along with political tension revolving around the sudden dismissal of the FBI chief made investors skeptical. Retail giants Macy’s Inc. (NYSE:M) and Kohl’s Corporation (NYSE:KSS) reported tepid first-quarter results. This took a toll on the consumer discretionary sector, which in turn might have dragged the market down. The benchmark S&P 500 posted its largest one-day percentage fall in four weeks yesterday.

This temporarily marred the positive sentiments prevailing in the market, courtesy of the improving macroeconomic indicators in the nation, and forced investors to turn to safe-haven investments like gold.

Nevertheless, investing in the stock market hardly backfires provided one is cautious. Considering the fact that sudden variability can hit the global market any time, it is better to choose stocks that bear relatively less risk. One of the investment strategies to choose less risky stocks is to measure a company’s debt level. Highly leveraged stocks are the most vulnerable ones at times of volatility.

Since debt financing is a very common phenomenon followed by corporations to expand their operations, only a few stocks come with zero leverage. Therefore one should resort to low-leveraged stocks. Using financial leverage ratio, one can easily discriminate between highly leveraged and low-leveraged stocks. One of the most popular leverage ratios is the debt-to-equity ratio.

Analyzing Debt-to-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 implies a more financially stable business, thereby making it a more worthy investment opportunity.

With the first–quarter reporting cycle almost over, we see an improved earnings growth picture compared to the preceding quarters. In times like these, investors tend to go for stocks exhibiting solid earnings growth, overlooking the debt on their balance sheet. So it is wiser to look for low-leveraged stocks that are financially more secure and immune to market upheavals.

The Winning Strategy

Considering the aforementioned discussion, it is imperative for a sensible investor to choose stocks that have a low debt-to-equity ratio.

However, 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.

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.

Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.

Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.

VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 24 stocks that made it through the screen.

Darden Restaurants, Inc. (NYSE:DRI) : This company is the world's largest casual dining restaurant and engages in the ownership and operation of casual dining restaurants in the U.S. and Canada. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 3.35% in the trailing four quarters.

Alphabet Inc. (NASDAQ:GOOGL) : It is one of the leading providers of target-based advertisements on the web. Its products and services involve the provision of web-based information through own and hosted (network) websites. The company carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 5.74% in the trailing four quarters.

Anthem, Inc. (NYSE:ANTM) : This corporation operates as a health benefits company in the U.S. It witnessed an average positive earnings surprise of 8.36% in the trailing four quarters and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana Inc. (NYSE:HUM) : It is one of the largest health care plan providers in the U.S. The company carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 3.75% in the trailing four quarters.

Nucor Corporation (NYSE:NUE) : The company is a leading producer of structural steel, steel bars, steel joists, steel deck and cold finished bars in the U.S. It carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 11.63% in the trailing four quarters.

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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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