5 Low Leverage Stocks to Buy Amid Inflation Woes

Wall Street stocks slipped on Aug 17 as major indices remained volatile amid the ongoing inflation pressure on the U.S. economy.

Such a scenario might discourage investors from investing in stocks. But one must not forget that such upheavals have continued to affect the global economy from time to time. So what we need is prudent investment. To this end, we recommend stocks like EchoStar SATS, Valero Energy VLO, Equinor ASA EQNR, PBF Energy PBF and Suncor Energy SU, which bear low leverage and therefore can shield investors from incurring 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 exorbitant debt financing.

Therefore, 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.

Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks, which 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 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 lower debt-to-equity ratio reflects improved solvency for a company.

With the second-quarter earnings cycle 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 aforementioned factors, 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 32 stocks that made it through the screen.

EchoStar: It is a global provider of satellite service operations, video delivery services, broadband satellite technologies and broadband Internet services for home and small office customers. In August 2022, the company released its second-quarter 2022 results. Notably, the company’s consolidated revenues in the reported quarter were flat year over year, as higher equipment sales were offset by lower services revenues.

SATS delivered an earnings surprise of 15.63% in the last reported quarter. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings implies a 171.8% improvement from the 2021 reported figure.

Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. In July 2022, the company posted its second-quarter results. The company reduced debt by $300 million through the acquisition of the 4.00 percent Gulf Opportunity Zone Revenue Bonds, thereby reducing its debt by $2.3 billion since the second half of 2021

VLO currently has a Zacks Rank #2. The company delivered an earnings surprise of 33.54% in the trailing four quarters, on average. The Zacks Consensus Estimate for 2022 sales suggests a 52.6% improvement year over year.

Equinor: It is one of the premier integrated energy companies in the world, with operations spreading across 30 countries. In August 2022, it was announced that Equinor’s Hydrogen to Humber Saltend production facility successfully progressed through Phase-2 of the government’s cluster sequencing process. The selected projects will now proceed to the due diligence stage of the Phase-2 cluster sequencing process to allow them to connect to the East Coast Cluster’s CO2 infrastructure and be operational in the mid-2020s.

EQNR sports a Zacks Rank #1 and delivered an earnings surprise of 7.33%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 sales indicates a 135.7% improvement from the 2021 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.

PBF Energy: It is a leading refiner of crude. In July 2022, it announced second-quarter 2022 results, which reflected lower consolidated debt by more than $2.2 billion including a $900 million revolving credit facility repayment and $45 million debt reduction at PBF Logistics.

Currently, PBF sports a Zacks Rank of 1. It delivered an earnings surprise of 77.97%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 sales implies a 52.5% improvement from the 2021 reported figure.

Suncor Energy: It is Canada's premier integrated energy company. The company's operations include oil sands development and upgrade, conventional and offshore crude oil and gas production, petroleum refining, and product marketing. In August 2022, SU announced its second-quarter results, which reflected adjusted funds from operations worth $5.345 billion that was the highest in the company’s history.

SU currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 6.96%, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 214% improvement from the 2021 reported figure.

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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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Valero Energy Corporation (VLO) : Free Stock Analysis Report
 
Suncor Energy Inc. (SU) : Free Stock Analysis Report
 
EchoStar Corporation (SATS) : Free Stock Analysis Report
 
PBF Energy Inc. (PBF) : Free Stock Analysis Report
 
Equinor ASA (EQNR) : Free Stock Analysis Report
 
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