Bet on these 5 low-leverage stocks to avoid the impacts of inflation

Investor sentiment in the US stock market looks pretty weak right now, with searing inflation hurting the US economy. Therefore, investors might find it risky to spend money on stocks.

Nevertheless, considering that the stock market faces such challenges from time to time, sometimes in the form of price increases and geopolitical uncertainties, one should not refrain from investing in stocks altogether. In these uncertain times, what to do is opt for safe actions like Domestic fuel gas NFG, Valero Energy VLO, Creditcorp BAP, Suncor Energy SU and Ryder Systems R which have low leverage.

Now, to choose low leverage stocks, you need to know the concept of leverage.

Leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. This borrowing can be done either through equity or through debt financing.

Empirically, it has been observed that the majority of companies prefer debt financing over equity to obtain such funds. This is because debt is cheaper than equity, especially in times of low interest rates. In case of equity financing, a shareholder not only becomes a partial owner of a company, but also has the right to a direct claim on its future profits. Thus, most companies try to avoid equity financing.

Yet, debt financing is not always desirable, especially in cases where a company opts for too much debt. In fact, exorbitant debt financing could even bankrupt a business in the worst case scenario. Therefore, a company’s level of debt is an important factor to consider when making an investment decision.

So, for a prudent investor, a safe strategy for picking stocks should also include looking for low-leverage stocks, in addition to other factors.

Therefore, measuring the leverage of a particular security is an integral part of a safe investment procedure.

Historically, several leverage ratios have been developed to measure the amount of debt a company has and the debt-to-equity ratio is one of the most common ratios.

Debt/equity analysis

Debt Ratio = Total Liabilities/Equity

This measure is a liquidity ratio that indicates the amount of financial risk that a company bears. A lower debt ratio reflects an improvement in a company’s solvency.

With the first quarter earnings cycle just ahead of us, investors should look to stocks that have shown strong earnings growth over the past few years. But if a stock has a high debt-to-equity ratio during an economic downturn, its so-called booming earnings picture could turn into a nightmare.

The winning strategy

Considering the above factors, it is prudent to choose stocks with a low leverage ratio to ensure regular returns.

Yet, an investment strategy based solely on the debt ratio might not yield the desired result. To choose stocks that have the potential to give you stable returns, we’ve expanded our selection criteria to include other factors.

Here are the other settings:

Debt/equity below X-Industry median: Stocks less leveraged than their sector counterparts.

Current price greater than or equal to 10: Stocks must trade at a minimum of $10 or more.

Average volume over 20 days greater than or equal to 50000: A substantial trading volume ensures that the security is easily tradable.

Percentage change in EPS F(0)/F(-1) above industry median X: Earnings growth adds to optimism, causing a stock price to appreciate.

VGM A or B rating: 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 most upside potential.

Estimated one-year EPS growth F(1)/F(0) greater than 5: This shows the earnings growth forecast.

Zacks Rank #1 or 2: Regardless of market conditions, stocks with a Zacks Rank #1 or 2 have a proven history of success.

Excluding stocks that have a negative or zero leverage ratio, here we present our five picks from the 33 stocks that crossed the screen.

Domestic fuel gas: It is an integrated energy company with natural gas assets located in the prolific Appalachian Basin and oil assets in California. In early March 2022, NFG joined a newly formed consortium, namely Building the Clean Hydrogen Economy. This should strengthen the position of this title in the renewable energy market.

National Fuel Gas has generated a 12.4% earnings surprise, on average, over the past four quarters and currently holds a No. 2 Zacks rank. Zacks consensus estimate for fiscal 2022 earnings has increased by 7.6% over the past 60 days.

Valero Energy: It is the largest independent refiner and marketer of petroleum products in the United States. VLO reduced its long-term debt by approximately $750 million in February 2022 through previously announced debt reduction and refinancing operations.

Valero Energy currently carries a No. 2 Zacks rank. The company has achieved a 75.7% earnings surprise over the past four quarters, on average. Zacks’ consensus estimate for 2022 revenue is up 21.1% over the past 60 days.

Creditcorp: It is the largest financial services holding company in Peru, with extensive experience in the Peruvian financial market. Its net interest income increased 19.8% year-over-year in the fourth quarter of 2021 and its efficiency ratio increased by 230 basis points.

BAP carries a No. 2 Zacks rank and boasts a long-term earnings growth rate of 22.5%. Zacks’ consensus estimate for 2022 revenue is up 13.7% over the past 60 days. You can see the full list of today’s Zacks #1 Rank stocks here.

Suncor Energy: It is a leading integrated energy company. Its activities include oil sands development and upgrading, conventional and offshore crude oil and gas production, petroleum refining and product marketing. Suncor reported adjusted operating income of 89 cents per share in the fourth quarter of 2021, reflecting a reversal from the adjusted operating loss of 7 cents suffered in the year-ago period.

Currently, Suncor has a Zacks ranking of 2. It has a long-term earnings growth rate of 13.7%. Its earnings estimate for 2022 has improved by 14.9% over the past 60 days.

Ryder Systems: It is recognized as one of the world’s leading providers of integrated logistics and transportation solutions. In March 2022, Ryder Systems announced that Southern Glazer’s had chosen Ryder to restructure its inbound transportation and implement a unique visibility and collaborative logistics technology, RyderShare.

Ryder Systems currently sports a No. 1 Zacks rank. It generated a four-quarter earnings surprise of 57.51% on average. R’s revenue estimate for 2022 has improved by 29.7% over the past 60 days.

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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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.

Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance

5 shares ready to double

Each was handpicked by a Zacks expert as the #1 preferred stock to earn +100% or more in 2021. Previous recommendations have skyrocketed +143.0%, +175.9%, + 498.3% and +673.0%.

Most of the stocks in this report fly under the radar on Wall Street, which provides a great opportunity to get in on the ground floor.

Today, check out these 5 potential home runs >>

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Ryder System, Inc. (R): Free Stock Analysis Report

Valero Energy Corporation (VLO): Free Stock Analysis Report

Suncor Energy Inc. (SU): Free Stock Analysis Report

National Fuel Gas Company (NFG): Free Inventory Analysis Report

Credicorp Ltd. (BAP): Free Stock Analysis Report

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