The majority of U.S. stock indices ended in the red on Nov. 28, following an unfavorable inflation data release, reflecting an uptick in the nation’s monthly consumer price.
In such a situation, an investor might not feel confident enough 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 Fox Corp. FOX, Coastal Financial CCB, NVIDIA Corporation NVDA, Freshpet Inc. FRPT and InterDigital IDCC. These stocks bear low leverage and, therefore, should be a safer option for investors if they don’t want to lose big in times of market turmoil.
Now, before selecting low-leverage stocks, let’s explore what leverage is and how choosing a low-leverage stock helps investors.
What’s the Significance of Low-Leverage Stocks?
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 third-quarter earnings season 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 12 stocks that made it through the screen.
FOX: It produces and distributes news, sports and entertainment content. On Nov. 4, 2024, Fox Corp. released its first-quarter fiscal 2025 results. The company reported revenues of $3.56 billion, which reflected an increase of 11% year over year. Adjusted earnings per share rose 33%.
The company boasts a long-term earnings growth rate of 7.1%. The Zacks Consensus Estimate for FOX’s fiscal 2025 sales suggests a 6.7% improvement from the fiscal 2024 actuals. It currently has a Zacks Rank #2.
Coastal Financial: It is a bank holding company that provides accounts checking, savings deposits, money market, mortgage and term loans services, as well as card facilities and Internet banking services, through its subsidiaries. On Oct. 28, 2024, Coastal Financial reported its third-quarter 2024 results. Its return on average assets was 1.34% compared with 1.13% for the third quarter of 2023.
The Zacks Consensus Estimate for CCB’s 2024 earnings suggests a 6.4% improvement from the 2023 reported number. The Zacks Consensus Estimate for CCB’s 2024 sales suggests a 31.4% improvement from the 2023 reported number. It currently carries a Zacks Rank #2.
NVIDIA Corporation: It is a worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. On Nov. 20, 2024, NVIDIA announced its third-quarter fiscal 2025 results. Its revenues of $35.1 billion improved 94% year over year, while adjusted earnings per share surged 103%.
This Zacks Rank #2 company boasts a long-term earnings growth rate of 20%. The Zacks Consensus Estimate for NVDA’s fiscal 2025 sales suggests a 110.9% improvement from the fiscal 2024 actuals.
Freshpet: It manufactures and markets natural fresh foods, refrigerated meals, and treats for dogs and cats in the United States and Canada. On Nov 4, 2024, Freshpet announced its third-quarter 2024 results. Its sales grew 26.3% year over to $253.4 million in the third quarter. FRPT’s net income of $11.9 million for the third quarter of 2024 improved from a net loss of $7.2 million in the prior year period.
It delivered a four-quarter average earnings surprise of 144.50%. The Zacks Consensus Estimate for FRPT’s 2024 sales implies an improvement of 27.3% from the 2023 actuals. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
InterDigital: It is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. On Oct. 31, 2024, the company released its third-quarter 2024 results. The company delivered revenues of $128.7 million, which exceeded the top end of its guidance, driven by the strong performance of its consumer electronics and IoT licensing program.
IDCC currently sports a Zacks Rank #1. The company boasts a long-term earnings growth rate of 17.4%. The Zacks Consensus Estimate for IDCC’s 2024 sales suggests a 56.4% improvement from the 2023 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.
Research Chief 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.
This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Freshpet, Inc. (FRPT) : Free Stock Analysis Report
InterDigital, Inc. (IDCC) : Free Stock Analysis Report
Fox Corporation (FOX) : Free Stock Analysis Report
Coastal Financial Corporation (CCB) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
