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Buy These 5 Low Leverage Stocks to Bolster Your Portfolio

Measuring the leverage level of a particular stock forms an integral part of a safe investment procedure. PNR, SKY, UFI, SIGI, and PIPR appear to be s...

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This story originally appeared on Zacks

With capital being one of the key requirements for a company to smoothly run its operations, one must have sufficient knowledge about its source. Since no company has infinite amount of capital, at some point they need to borrow funds to finance this capital. Now this borrowing can be done either using debt or equity.   

- Zacks

And here comes the concept of leverage, which refers to the use of borrowed funds by companies in corporate finance. Empirically, it has been observed that most companies prefer debt financing. This is because when a company resorts to debt financing, it incurs fixed expenses in the form of interest payments for a specific time period. However, in case of equity financing, a shareholder not only becomes a company’s partial owner but also gets entitled to a direct claim on its future profits.

However, debt financing possesses some drawbacks. In particular, debt financing is not desirable if it fails to generate a higher rate of return compared to the interest rate. So, one should always avoid resorting to exorbitant debt financing, which might even lead to a corporation’s bankruptcy in the worst-case scenario.

So, to avoid huge losses, a prudent investor should always go for stocks that bear low leverage since a debt-free corporation is rare to find. Therefore, measuring the leverage level of a particular stock forms an integral part of the safe investment procedure.  

Historically several leverage ratios have been developed to measure the amount of debt a company bears and 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 company with a lower debt-to-equity ratio shows improved solvency for a company.

With the second-quarter earnings season almost coming to an end, investors must be eyeing stocks that exhibited solid earnings growth in the recent past. But if a stock bears a high debt-to-equity ratio, in times of economic downturns, its so-called booming earnings picture might turn into a nightmare.

The Winning Strategy

Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.

However, an investment strategy based solely on 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 (Strong Buy) or 2 (Buy) have a proven history of success.

Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 29 stocks that made it through the screen.

Pentair plc PNR: It delivers a comprehensive range of smart, sustainable water solutions to homes, business and industry globally. The company delivered an earnings surprise of 20.88%, on average, in the trailing four quarters and carries a Zacks Rank #2 currently.

Skyline Corporation SKY: It designs, produces and distributes manufactured housing and recreational vehicles. The company currently sports a Zacks Rank #1 and delivered an earnings surprise of 44.67% in the trailing four quarters, on average.

Unifi, Inc. UFI: It is a global textile solutions provider and one of the world's leading innovators in manufacturing synthetic and recycled performance fibers. The company came up with a four-quarter earnings surprise of 209.62%, on average, and has a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Selective Insurance Group SIGI: It offers insurance products and services across the United States. Currently, the company holds a Zacks Rank of 2 and came up with a four-quarter earnings surprise of 42.10%, on average.

Piper Sandler Companies PIPR: It is a focused securities firm dedicated to delivering superior financial advice, investment products and transaction execution within selected sectors of the financial services marketplace. The company currently sports a Zacks Rank #1 and delivered a four-quarter earnings surprise of 72.80%, on average.

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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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Selective Insurance Group, Inc. (SIGI): Free Stock Analysis Report

 

Pentair plc (PNR): Free Stock Analysis Report

 

Skyline Corporation (SKY): Free Stock Analysis Report

 

Unifi, Inc. (UFI): Free Stock Analysis Report

 

Piper Sandler Companies (PIPR): Free Stock Analysis Report

 

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Zacks Investment Research