The March U.S. jobs report, which released last Friday, showed a resilient economy and moderate inflation. So, we may expect Wall Street stocks to come up with a more or less steady performance, once the market opens on Apr 10.
This should encourage investors to spend in the stock market. Considering the fact that the overall market situation is still volatile to some extent, one should progress with caution. Therefore, we recommend stocks like Marcus Corp MCS, GameStop GME, AssetMark Financial AMK, Humana HUM and ICF International ICFI, 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.
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 cycle knocking on the doors, 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 14 stocks that made it through the screen.
Marcus Corp.: It engages in the lodging and entertainment industries. On Mar 2, 2023, the company reported its fourth-quarter and full-year fiscal 2022 results. Marcus’ total revenues for the fiscal fourth quarter were $162.9 million, reflecting a 3.6% decrease from the fourth quarter of fiscal 2021.
MCS delivered an earnings surprise of 64.15%, on average, in the trailing four quarters. It carries a Zacks Rank #2 currently. The Zacks Consensus Estimate for fiscal 2023 sales implies a 10.9% improvement from the fiscal 2022 reported figure.
GameStop: It is the world's largest video game retailer, which offers the best selection of new and pre-owned video gaming consoles, accessories and video game titles, in both physical and digital formats. On Mar 21, 2023, GameStop reported its fourth-quarter and full-year fiscal 2022 results. Its Q4 net sales declined 1.2% year over year to $2.23 billion, while its earnings per share improved to 16 cents from a loss of 49 cents incurred in the fourth quarter of 2021.
GME currently carries a Zacks Rank #2. The company delivered an average earnings surprise of 37.29% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2023 earnings suggests a 50% improvement year over year.
AssetMark Financial: It provides wealth management and technology solutions to financial advisers and their clients. On Mar 13, 2023, the company released its February report. Notably, its platform assets improved 5.4% year over year in February 2023, while net flows went down 22.2%.
AMK carries a Zacks Rank #2 and delivered an earnings surprise of 7.95%, on average, in the trailing four quarters. The Zacks Consensus Estimate for 2023 sales indicates a 24.3% improvement from the 2022 figure. You can see the complete list of today’s Zacks #1 Rank stocks here.
Humana: It is one of the largest healthcare plan providers in the United States. On Apr 3, 2023, the company released its annual and sustainability report 2022 report. Per the report, Humana witnessed growth through organic growth and important acquisitions.
HUM currently carries a Zacks Rank #2. It delivered a four-quarter earnings surprise of 12.95%, on average. The Zacks Consensus Estimate for 2023 sales suggests an 11.5% improvement from the 2022 reported figure.
ICF International: It is a provider of professional services and technology-based solutions to government and commercial clients. On Feb 28, 2023, the company reported its fourth-quarter and full-year 2022 results. Its total revenues in fourth-quarter 2022 increased 22.6% to $475.6 million from the fourth quarter of 2021.
ICFI currently sports a Zacks Rank #1. It delivered a four-quarter earnings surprise of 9.21%, on average. The Zacks Consensus Estimate for 2023 sales suggests a 9.2% improvement from the 2022 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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