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Buy these 5 Low Leverage Stocks to Withstand Market Downturn

Wall Street was hit hard yesterday as tech stocks witnessed another downturn and Senate’s delayed health-care vote created multiple soft spots in the stock market. On the one hand, European Commission’s record $2.7 billion fine imposed on Google for violating antitrust rules resulted in sell-offs for large-cap tech majors, while on the other hand, a delayed vote to repeal and replace Obamacare created uncertainty regarding President Trump’s domestic agenda.

Together these two factors dented the positive market sentiment witnessed earlier this month, buoyed by the Fed rate hike.

Investors may be in a fix whether to put money in the stock market now or tread cautiously. However, considering the fact that the U.S. remains the world’s largest economy, there’s no reason to lose faith altogether. A prudent investment strategy is the need of the hour.

As we all know, debt-ridden companies are more prone to bankruptcy in times of financial crisis. In fact, the very foundation of making safe investments is to avoid high-leverage stocks. However, debt financing forms an integral part of corporate finance, with equity being a dearer option for financing.

Still, the less the debt the better. 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-to-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 implies a more financially stable business, thereby making it a more worthy investment opportunity.

With the second quarter coming to an end for most companies, we see an improvement in expected earnings growth compared with the preceding quarters. In times like these, investors tend to go for stocks exhibiting solid earnings growth, overlooking the debt on their balance sheet. It is, however, wiser to look for low-leveraged stocks that are financially more secure and thus less susceptible to market upheavals.

The Winning Strategy

Considering the aforementioned discussion, it is imperative for a sensible investor to choose stocks that have a low debt-to-equity ratio.

However, 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.

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.

Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.

Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.

VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 17 stocks that made it through the screen.

Sterling Construction Company, Inc. STRL: This company operates as a wholesale distributor to automotive aftermarket and construction. It carries a Zacks Rank #2 and has a long-term earnings growth rate of 6%.

Sierra Wireless, Inc. SWIR: It is one of the leading providers of wireless data communications products. Sierra carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 155.87% in the trailing four quarters.

Anthem, Inc. ANTM: This corporation operates as a health benefits company in the U.S. It witnessed an average positive earnings surprise of 8.36% in the trailing four quarters and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana Inc.HUM: It is one of the largest health care plan providers in the U.S. The company carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 3.75% in the trailing four quarters.

Vodafone Group PLC VOD: It is the world's largest international mobile communications firm. It primarily operates digital and analog cellular telephone networks of Vodafone. It carries a Zacks Rank #2 and has a long-term earnings growth rate of 6%.

Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.

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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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Sterling Construction Company Inc (STRL): Free Stock Analysis Report
 
Sierra Wireless, Inc. (SWIR): Free Stock Analysis Report
 
Humana Inc. (HUM): Free Stock Analysis Report
 
Anthem, Inc. (ANTM): Free Stock Analysis Report
 
Vodafone Group PLC (VOD): Free Stock Analysis Report
 
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