Borrowing cost in the United States is currently at a 16-year high. This is due to the Federal Reserve’s aggressive interest rate hike to tame the four-decade-high inflation. After 10 consecutive interest rate hikes, the Fed took a pause in its June meeting as the inflation rate was on a downward trajectory.
Fed controls the overnight interest rate, which banks and credit unions apply to borrow and lend to each other. By increasing interest rates, the Fed expects to cool off demand by making borrowing of money more expensive. This will help Fed to put a check on inflation. Currently, the interest rate is in the range of 5.00-5.25%. The Fed chairman has hinted at another half a percentage rate hike this year based on the inflation rate to meet its long-term goal of 2%.
Companies with high debt exposure are mostly impacted by the high-interest-rate regime. High-interest rates increase the cost of borrowing. Due to a higher interest payout, profitability would also take a hit, which in turn would affect the stock prices in the near term.
Thus, investors with a conservative point of view can invest in companies with low-debt equity ratio as they provide protection from bankruptcy and a higher return on equity during adverse economic situations. Companies with low-debt equity ratios can exercise more control over their finances as they have negligible exposure to interest rate risks.
The financial metric provide an overall view of how much the company is relying on debt to finance its operations. The debt-equity ratio varies from industry to industry. Also, investors can consider viewing long-term debt over total liability as it carries more risk over the short term.
On that note, let us look at companies like NVIDIA NVDA, PulteGroup PHM and Salesforce CRM that have a very low debt-equity ratio within the range of 0-0.5 and have outperformed the S&P 500 Index.
NVIDIA is headquartered in Santa Clara, CA. This Zacks Rank #1 (Strong Buy) company is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
As of Jan 31, 2023, NVDA has reported long-term debt of $9.7 billion and cash & equivalent of $13.3 billion. It has a debt-equity ratio of 0.40.
NVIDIA’s shares gained 181.3% over the past year compared with the S&P 500’s gain of 16.5%.
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PulteGroup is headquartered in Atlanta, GA. This Zacks Rank #1 company is engaged in homebuilding and financial services businesses.
As of Dec 31, 2022, PHM has reported long-term debt of $2.1 billion and cash & equivalent of $1.1 billion. It has a debt-equity ratio of 0.22.
PHM’s shares gained 85.4% over the past year compared with the S&P 500’s gain of 16.5%.
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Salesforce is headquartered in San Francisco, CA. This Zacks Rank #1 company is the leading provider of on-demand Customer Relationship Management software.
As of Jan 31, 2023, CRM reported long-term debt of $9.4 billion and cash & equivalent of $12.5 billion. It has a debt-equity ratio of 0.16.
CRM’s shares gained 25.1% over the past year compared with the S&P 500’s gain of 16.5%.
Image Source: Zacks Investment Research
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>Salesforce Inc. (CRM) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
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