The majority of U.S. equities indices ended last week on a high note in anticipation of more Fed rate cuts in 2025, which bolstered market optimism and, thereby, stocks on the bourses.
In such a situation, investors might rush to invest in stocks. However, keeping in mind the volatile situation of the world economy lately, it is advisable to choose stocks that come with low leverage and thereby carry less risk during periods of uncertainty. In this regard, we recommend stocks like NVIDIA Corp. NVDA, Navigator Holdings NVGS, Sylvamo SLVM, The Greenbrier Companies GBX and Fox Corp. FOX. 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 already underway, 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 15 stocks that made it through the screen.
NVIDIA: It is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit (GPU). On Jan. 16, 2025, NVIDIA released its NIM microservices to enhance accuracy, security and control for enterprises building artificial intelligence (AI) across industries.
The company boasts a long-term (three-to-five years) earnings growth rate of 20%. The Zacks Consensus Estimate for NVDA’s fiscal 2025 sales suggests a 111.8% improvement from the fiscal 2024 actuals. It currently has a Zacks Rank #2.
Navigator Holdings: It provides international seaborne transportation and regional distribution services of liquefied petroleum gas, petrochemical gases and ammonia for energy companies, industrial users and commodity traders. On Jan. 7, 2025, Navigator Holdings announced the completion of the expansion of its existing ethylene export terminal joint venture owned 50/50 by Navigator and Enterprise Products Partners L.P. at Morgan’s Point, Houston. Navigator Gas also announced an agreement to acquire three handysize ethylene carriers for a total purchase price of $83.9 million, complementing the increased export capacity from the Export Terminal Joint Venture.
The Zacks Consensus Estimate for NVGS’ 2025 earnings suggests a 40.7% improvement from the 2024 estimated number. The Zacks Consensus Estimate for its 2025 sales suggests a 4.7% improvement from the 2024 expected number. It currently sports a Zacks Rank #1.
Sylvamo: It is a paper company that transforms renewable resources into papers, with mills principally in Europe, Latin America and North America. On Dec. 3, 2024, Sylvamo announced that it has access to $60 million initially put in escrow for disputed goodwill tax deductions in Brazil, which the company intends to use to pay down debt.
It delivered a long-term earnings growth rate of 4.2%. The stock boasts a four-quarter average earnings surprise of 16.70%. It currently sports a Zacks Rank #1.
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.
Fox Corp.: 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 (three-to-five years) earnings growth rate of 7.1%. The stock delivered an earnings surprise of 31.82% in the last reported quarter. It currently sports a Zacks Rank #1.
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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.
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."
Since 1988, the full list has beaten the market more than 2X over with an average gain of +24.1% per year. So be sure to give these hand picked 7 your immediate attention.
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Greenbrier Companies, Inc. (The) (GBX) : Free Stock Analysis Report
Fox Corporation (FOX) : Free Stock Analysis Report
Navigator Holdings Ltd. (NVGS) : Free Stock Analysis Report
Sylvamo Corporation (SLVM) : 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.
