5 Low Leverage Stocks to Hedge Your Portfolio

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"Leverage is great when it works, and when it doesn't work, it creates a lot of issues" - Marc Lasry.

The term 'leverage' is common in the business world. But when it comes to investment, this term holds the key to the treasures hidden in a stock. Although debt financing is nothing new for big corporations to fund their operations, the degree of financial leverage that a business bears always catches the attention of credit analysts.

This is because in the uncertain world of investments, it is difficult to predict macroeconomic and competitive changes that often lead markets to significant downturns. Companies with a higher degree of financial leverage are more prone to incur significant losses during such downturns, and even bankruptcy in the worst case scenario.

In order to avoid such risks, there are varied leverage ratios that an investor can use to understand a company's capital structure before investing in its stock. The most popular among these is debt-to-equity ratio.

This metric is a basically a solvency ratio that measures the extent of financial leverage that a company is bearing. A lower debt-to-equity ratio greatly contributes to an investor's confidence in a company's financial stability.

Understanding the Formula

Debt-to-Equity Ratio = Total Liabilities/Shareholders' Equity

A higher debt-to-equity ratio implies a more risky business and what better time to remind investors of this than the peak first-quarter earnings season when they must be flocking to high earnings-yielding companies. However, blindly pursuing such a stock might drain all your money before you know if it bears a high debt-to-equity ratio.

This is because a high debt-to-equity ratio indicates more leverage which always tends to increase the volatility of a company's earnings and cash flows; thereby raising the variability of return on its equity.

The Winning Strategy

It is not wise to choose an investment strategy based solely on the debt-to-equity ratio. To choose stocks that also have the potential to give you steady returns, we have expanded our screening procedure to include some other criteria.

Here is the final screen:

Debt/Equity less than X-Industry Median: Thestocks are less leveragedcompared to 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: Asubstantial trading volume ensures that the stock is easily tradable.

Percentage Change in EPS F(0)/F(-1) greater than X-Industry Median: Earnings growth add to optimism, leading to a stock's price appreciation.

Estimated One-Year EPS Growth F(1)/F(0) greater than 10: 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 (Strong Buy) or 2 (Buy) have a proven history of success.

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 or 2 offer the best upside potential. 

Although 31 stocks passed the screen, we have eliminated those that had a negative or a zero debt-to-equity ratio.

Here are five stocks from the final 18 that have a favorable debt-to-equity ratio:

  • Skechers U.S.A., Inc. ( SKX )
  • Cash America International, Inc. ( CSH )
  • Universal Forest Products Inc. ( UFPI )
  • Comfort Systems USA Inc. ( FIX )
  • CONE Midstream Partners LP ( CNNX )

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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: http://www.zacks.com/performance .

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CONE MIDSTREAM (CNNX): Free Stock Analysis Report

COMFORT SYSTEMS (FIX): Free Stock Analysis Report

UNIVL FST PRODS (UFPI): Free Stock Analysis Report

CASH AM INTL (CSH): Free Stock Analysis Report

SKECHERS USA-A (SKX): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Business , Investing , Stocks
Referenced Symbols: FIX , UFPI , SKX

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