Bet on These 5 Low Leverage Stocks to Avoid Losses

Some major U.S. stocks closed slightly lower on May 16, after starting the day at a record high level, as investors’ enthusiasm around interest rate cut expectations and a slowdown in inflation data dissipated during the course of the day.    

In such a situation, we recommend stocks like Vital Farms VITL, Pathward Financial CASH, Atmos Energy ATO, Sprouts Farmer Market SFM and Hamilton Insurance Group HG, which bear low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.

Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.

In finance, leverage is a term used to denote the practice of borrowing capital by companies to run their operations smoothly and expand the same. Such borrowings are done through debt financing. But there remains an option for equity finance. This is probably due to the cheap and easy availability of debt over equity financing.

However, debt financing has its share of drawbacks. Particularly, it is desirable only as long as it successfully generates a higher rate of return compared to the interest rate. So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to excessive debt financing.

The crux of safe investment lies in choosing a company that is not burdened with debt, as a debt-free stock is almost impossible to find.

The equity market can be volatile at times, and, as an investor, if you don’t want to lose big time, we suggest you invest in stocks that bear low leverage and are, hence, less risky.

To identify such stocks, historically, several leverage ratios have been developed to measure the amount of debt a company bears. 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 lower debt-to-equity ratio reflects improved solvency for a company.

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

The Winning Strategy

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

Yet, 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 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 or 2 have a proven history of success.

Excluding stocks that have a negative or a zero debt-to-equity ratio, here we present our five picks out of the 20 stocks that made it through the screen.

Vital Farms: The company offers a range of produced pasture-raised foods, including shell eggs, butter, hard-boiled eggs, ghee and liquid whole eggs. On May 9, 2024. Vital Farms released its first-quarter 2024 results. Its net revenues increased 24.1% year over year to a record $147.9 million, while its earnings per share improved 168.8% to 43 cents.

VITL boasts a four-quarter average earnings surprise of 102.10%. It sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for VITL’s 2024 sales suggests a solid 22.5% improvement from 2023’s reported figure.

Pathward Financial: The company operates as the holding company for Pathward, National Association, which provides banking products and services principally in the United States. On May 16, 2024, the company announced the expansion and transformation of its suite of offerings for financial institutions. Formerly known for providing prepaid cards to banks and credit unions, Pathward’s new solution for financial institutions offers expanded options for commercial finance solutions and merchant services. This new solution provides an enhanced, turnkey product lineup for financial institutions that cuts out the need for multiple third parties.

CASH currently holds a Zacks Rank #2. The company boasts a four-quarter average earnings surprise of 102.10%. The Zacks Consensus Estimate for CASH’s 2024 sales suggests a 6.5% improvement from the year-ago reported quarter.

Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On May 8, 2024, Atmos Energy announced its second-quarter fiscal 2024 results. Its earnings per share came in at $4.93, higher than the year-ago quarter’s level of $4.40.

ATO currently carries a Zacks Rank #2. The company boasts a long-term earnings growth rate of 7%. The Zacks Consensus Estimate for ATO’s fiscal 2024 sales implies an increase of 9.5% from fiscal 2023 sales. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sprouts Farmers Market: It has a unique model that features fresh produce, a foods section and a vitamin department focused on overall wellness. On May 1, 2024, the company announced its first-quarter 2024 results. Its net sales grew 9% year over year.

SFM currently sports a Zacks Rank #1. The company has a long-term earnings growth rate of 9%. The Zacks Consensus Estimate for SFM’s 2024 sales implies an improvement of 8% from the 2023 reported sales figure.  

Hamilton Insurance: The company underwrites specialty insurance and reinsurance risks principally in Bermuda and internationally. On May 8, 2024, the company released its first-quarter 2024 results. Its net premiums earned increased 35.7% year over year.

HG currently sports a Zacks Rank #1. The company delivered an earnings surprise of 27.78% in the last reported quarter. The Zacks Consensus Estimate for HG’s 2024 sales suggests a 41.5% improvement from the 2023 reported figure.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your trading. Further, you can also create your strategies and backtest them first before taking the investment plunge.

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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.

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 >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Atmos Energy Corporation (ATO) : Free Stock Analysis Report

Pathward Financial, Inc. (CASH) : Free Stock Analysis Report

Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report

Vital Farms, Inc. (VITL) : Free Stock Analysis Report

Hamilton Insurance Group, Ltd. (HG) : Free Stock Analysis Report

To read this article on Zacks.com click here.

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.

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