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Bet on These 5 Low Leverage Stocks to Avoid Inflation Woes

Wall Street stocks tumbled on Dec 28 as investors remained concerned about a possible recession even as the Federal Reserve fights fiercely to tame the ongoing inflation. The rise in global COVID patients once again, along with recent flight cancellations amid the severe weather pattern prevalent in the United States, may have also added to investors’ concerns.

Considering the current situation, an investor might not feel encouraged to invest in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like MGIC Investment MTG, TravelCenters of America TA, Hancock Whitney HWC, Chatham Lodging Trust REIT CLDT and Kinsale Capital Group KNSL, 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.

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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 fourth-quarter earnings cycle ahead of 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 17 stocks that made it through the screen.

MGIC Investment: It is the parent company of Mortgage Guaranty Insurance Corporation, the largest private mortgage insurer in the United States. On Dec 8, 2022, the company announced its partnership with Vesta, a modern mortgage loan origination system (LOS) and software-as-a-service company. With this partnership, lenders using the Vesta platform will be able to seamlessly and in real-time, request quotes and order private mortgage insurance from MGIC without leaving the Vesta LOS.

MTG delivered an earnings surprise of 36.34%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for 2022 earnings implies a 49.7% improvement from the 2021 reported figure.

TravelCenters of America: It is a full-service national travel center chain in the United States, with nationwide locations serving hundreds of thousands of professional drivers and other highway travelers each month, including virtually all major trucking fleets.  In November 2022, the company posted its third-quarter 2022 results. The company reported a 67% increase in net income and a 36% improvement in adjusted EBITDA.

TA currently sports a Zacks Rank #1. The company delivered an earnings surprise of 26.37% in the last reported quarter. The Zacks Consensus Estimate for 2022 earnings suggests a 119.7% improvement year over year.

Hancock Whitney: It is a bank and financial holding company, which operates through 177 full-service bank branches and 239 automated teller machines across the states of Mississippi, Alabama, Louisiana, Florida and Texas.  The company announced its third-quarter 2022 results in October 2022. Its net interest income (TE) for the third quarter of 2022 was $282.9 million, reflecting a sequential increase of 14%.

HWC carries a Zacks Rank #2 and delivered an earnings surprise of 5.23%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2022 earnings indicates a 7.8% improvement from the 2021 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chatham Lodging: It is a self-advised hotel REIT formed to invest in premium-branded upscale extended-stay and select-service hotels. On Dec 20, 2022, the company revealed that it has increased commitments under its senior unsecured revolving credit facility by $45 million with the addition of Royal Bank of Canada as a top-tier lender.

CLDT currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 204.57%, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 303.5% improvement from the 2021 reported figure.

Kinsale Capital: It offers various insurance and reinsurance products across all 50 states of the United States, the District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. On Dec 16, 2022, Kinsale Capital announced that it has acquired real estate property adjacent to its current headquarters in Richmond, Virginia for $76.2 million through a wholly owned subsidiary.

KNSL currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 15.16%, on average. The Zacks Consensus Estimate for 2022 earnings suggests a 27.5% 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

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

MGIC Investment Corporation (MTG) : Free Stock Analysis Report

TravelCenters of America LLC (TA) : Free Stock Analysis Report

Chatham Lodging Trust REIT (CLDT) : Free Stock Analysis Report

Kinsale Capital Group, Inc. (KNSL) : Free Stock Analysis Report

Hancock Whitney Corporation (HWC) : Free Stock Analysis Report

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