5 Low-Leverage Picks for Risk-Averse Investors

Often investors looking for growth-yielding stocks incur huge losses in times of crisis as they tend to overlook their debt level at the time of adding them to your portfolio. Since a debt-ridden stock can be a riskier choice, one may buy low-leverage stocks like STMicroelectronics STM, Schneider National SNDR, Chevron CVX, Fabrinet FN and Jacobs Engineering Group J.  

– Zacks

However, before choosing these stocks one should be well aware of leverage stocks. This is why low leverage stocks are safer options for a risk-averse investor. Notably, leverage is a common practice in corporate finance, which refers to the use of exogenous funds by companies to run their operations smoothly and expand the same. Now, companies can obtain these exogenous funds either through equity financing or debt financing.

Statistically, it is found that debt financing is preferred over equity because of its easy and cheap availability.

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 avert companies that resort to exorbitant debt financing.

Therefore, the crux of safe investment lies in choosing a company that is not overtly burdened with debt as a debt-free stock is almost impossible to be found.  

To identify such stocks, 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/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 company with a lower debt-to-equity ratio shows improved solvency for a company.

With the fourth-quarter earnings cycle halfway through, 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 downturns, its so-called booming earnings picture might turn into a nightmare.

The Winning Strategy

Considering the aforementioned factors, it is prudent to choose stocks with a low debt-to-equity ratio to ensure steady returns.
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 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 21 stocks that made it through the screen.

STMicroelectronics: It is a global independent semiconductor company, which designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices. The company recently announced that its new dual-channel galvanically-isolated gate drivers for IGBTs and silicon-carbide (SiC) MOSFETs save space and ease circuit design in high-voltage power conversion and industrial applications. Such innovations should boost the stock’s position in the semiconductor industry.

STMicroelectronics delivered an earnings surprise of 7.29%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for STM’s 2022 earnings has moved up 21.1% in the past 30 days.

Schneider National: It is a leading transportation and logistics services company. Schneider National recently announced that the company is expanding its intermodal service by moving its primary western United States rail partnership to Union Pacific beginning in 2023. This should boost SNDR’s revenues in the long term.

Schneider National currently carries a Zacks Rank #1. The company delivered an earnings surprise of 22.06% in the trailing four quarters, on average. SNDR boasts a long-term earnings growth rate of 20.7%.

Chevron: It is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. The company reported adjusted fourth-quarter earnings per share of $2.56, which missed the Zacks Consensus Estimate of $3.11.
Chevron came up with a four-quarter earnings surprise of 6.28%, on average, and carries a Zacks Rank of 1. CVX boasts a long-term earnings growth rate of 8.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Fabrinet: It provides precision optical, electro-mechanical and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and sub-systems, industrial lasers and sensors. Fabrinet’s second-quarter fiscal 2022 earnings of $1.50 per share surpassed the Zacks Consensus Estimate of $1.47 per share.

Currently, Fabrinet carries a Zacks Rank of 2. It delivered a four-quarter earnings surprise of 5.92%, on average.

Jacobs Engineering Group: It is one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients. The company recently won a feasibility study contract from the renewable energy company RWE to investigate the production and supply of green hydrogen in South Wales, U.K. This can be expected to boost Jacob’s position in the booming renewable energy industry.

Jacobs Engineering currently has a Zacks Rank #2 and delivered a four-quarter earnings surprise of 12.71%, on average. Its long-term earnings growth rate estimate is 12.4%.

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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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STMicroelectronics N.V. (STM): Free Stock Analysis Report
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