The majority of U.S. equities indices finished barely in the green on Feb. 18, following President’s Day. This reflected investors’ skepticism surrounding Trump’s tariff policy and hardly any possibility of a Fed rate cut. Notably, the U.S. President indicated levying a 25% tariff on automobile, semiconductor and pharmaceutical imports yesterday. The general market consensus indicated that the Fed might not cut interest rates anytime soon to tackle inflation.
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 Alcoa Corp AA, Noble Corporation Plc NE, Nextracker NXT, The Greenbrier Companies GBX and EZCORP EZPW. 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 fourth-quarter 2024 earnings season in its mid-way, 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 11 stocks that made it through the screen.
Alcoa Corp.: It is a global industry leader in bauxite, alumina and aluminum products. On Jan. 22, 2025, the company reported results for the fourth quarter of 2024. AA’s adjusted earnings per share grew 82.5% year over year, while its fourth-quarter revenues improved 20%.
The Zacks Consensus Estimate for AA’s 2025 sales suggests a 13.2% improvement from 2024 actuals. The stock boasts a long-term (three-to-five years) earnings growth rate of 40.8%. It currently has a Zacks Rank #2.
Noble Corporation: It is an offshore drilling contractor in the oil and gas industry. On Feb. 17, 2025, the company released its fourth-quarter 2024 results. NE’s adjusted net income grew 63% year over year, while its fourth-quarter revenues improved 44.2%.
The Zacks Consensus Estimate for its 2025 sales suggests a year-over-year improvement of 18.4%. The Zacks Consensus Estimate for its 2025 earnings suggests a year-over-year improvement of 22%. It currently carries a Zacks Rank #2.
Nextracker: It is a provider of intelligent, integrated solar tracker and software solutions used in utility-scale and distributed generation solar power plants. On Jan. 28, 2025, the company reported its third-quarter fiscal 2025 results. NXT registered a record backlog in the fiscal third quarter, which increased to more than $4.5 billion.
It delivered a four-quarter average earnings surprise of 57.44%. The Zacks Consensus Estimate for its fiscal 2025 sales suggests a 14.2% improvement from the fiscal 2024 reported number. It currently carries a Zacks Rank #2.
The Greenbrier Companies: It is a leading supplier of transportation equipment and services to the railroad and related industries. On Jan. 8, 2025, the company reported its first-quarter fiscal 2025 results. It reported net earnings of $55 million, or $1.72 per share, on revenues of $876 million and an operating margin of 12.8%.
GBX boasts a long-term earnings growth rate of 11.7%. The stock boasts a four-quarter average earnings surprise of 31.85%. It currently sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ezcorp.: It is engaged in establishing, acquiring, and operating pawnshops, which function as convenient sources of consumer credit and as value-oriented specialty retailers of primarily previously owned merchandise. On Feb. 5, 2025, the company announced its first-quarter fiscal 2025 results. Its adjusted net income improved 14% year over year, while revenues increased 7%.
The Zacks Consensus Estimate for its fiscal 2025 sales suggests an 8.2% improvement from the fiscal 2024 reported number. The company delivered an average earnings surprise of 10.31% in the last four quarters. It currently carries a Zacks Rank #2.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your trading. Further, you can also create your strategies and backtest them first before taking the investment plunge.
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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.
Zacks' Research Chief Names "Stock Most Likely to Double"
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. 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.
Noble Corporation PLC (NE) : Free Stock Analysis Report
Alcoa (AA) : Free Stock Analysis Report
EZCORP, Inc. (EZPW) : Free Stock Analysis Report
Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
Nextracker Inc. (NXT) : 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.
