5 Low-Leverage Stocks That Risk-Averse Investors May Buy

The U.S. equity futures rose in the early hours of Feb 21, even while the U.S. stock market was closed due to President’s Day, thanks to a rumor of a summit on Ukraine between America and Ukraine. However, this gain was momentary, as it was soon confirmed that no such summit was taking place.

Such an event shows how volatile the equity market can be at times and as an investor if you don’t want to lose big time, we suggest you invest in stocks like Valero Energy VLO, STMicroelectronics STM, Western Midstream Partners WES, Chevron CVX and Atmos Energy ATO which bear low leverage and are hence are less risky.

Now one must understand that you cannot totally avoid risk while investing in the stock market but of course you can minimize it and there comes the concept of choosing a low leverage stock. But first, one should be aware of what leverage means.

Leverage is a well-known strategy in corporate finance, which refers to the use of borrowed capital by companies in their business operations. Although this borrowing can be done through equity or debt financing, statistically it has been observed that debt financing is being preferred over equity by the majority of corporations.

This preference is probably due to the cheap and easy availability of debt over equity financing.

However, at times debt financing can be detrimental for a company’s prospects, especially when a company bears too much debt compared to its assets. So, one should look for stocks that are not heavily burdened with debt.
So, the next step should be how to identify such stocks that are not overburdened with debt as a debt-free stock is almost impossible to find.

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 ongoing, 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 (Strong Buy) or 2 (Buy) 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 26 stocks that made it through the screen.

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 through its previously announced debt reduction and refinancing transactions.

Valero Energy delivered an earnings surprise of 75.74%, on average, in the trailing four quarters and sports a Zacks Rank #1 currently. The Zacks Consensus Estimate for 2022 earnings has moved up 1.7% in the past 60 days.

STMicroelectronics: It is a global independent semiconductor company, which designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices. STM recently unveiled automotive microcontrollers (MCUs) optimized for electric vehicles and centralized (domain and zonal) electronic architectures.

STMicroelectronics currently carries a Zacks Rank #1. The company delivered an earnings surprise of 7.29% in the trailing four quarters, on average. STM boasts a long-term earnings growth rate of 5%.

Western Midstream Partners: It operates, acquires and develops midstream energy assets. WES recently declared a quarterly cash distribution of 32.7 cents per unit for the fourth quarter of 2021, up 1.3% from the prior quarter’s distribution

Western Midstream carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2022 earnings has moved up 4.7% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

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. In January 2022, CVX declared a quarterly dividend of $1.42 per share, an increase of 6%.

Currently, Chevron has a Zacks Rank of 2. It delivered a four-quarter earnings surprise of 6.28%, on average. Its 2022 earnings estimate has improved 13.9% over the past 60 days.

Atmos Energy: It is engaged in regulated natural gas distribution and storage business. ATOS announced its fiscal first-quarter 2022 results on Feb 8, 2022. Its earnings came in at $1.86 for the fiscal first quarter.

Atmos Energy currently carries a Zacks Rank #2 and delivered a four-quarter earnings surprise of 4.40%, on average. Its long-term earnings growth estimate is 7.3%.

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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.

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STMicroelectronics N.V. (STM) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
Valero Energy Corporation (VLO) : Free Stock Analysis Report
Western Midstream Partners, LP (WES) : Free Stock Analysis Report
Atmos Energy Corporation (ATO) : Free Stock Analysis Report
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