5 Low-Leverage Stocks to Buy Amid U.S.-China Trade Tension

Major stock indices in the United States ended lower on Jul 17, 2024, pulled down by microchip stocks' decline. Notably, microchip stocks sank following news reports that the Biden administration might impose severe trade restrictions against China in a bid to contain the availability of semiconductor technology to the latter.  

Against this backdrop, stock market players might not feel confident in making investments as trade tensions between these two economic giants sometimes result in global market imbalance. However, a prudent investor knows that one can buy stocks that are safe bets in periods of market decline. To this end, we recommend stocks like Vital Farms VITL, Donaldson DCI, Atmos Energy ATO, First Solar FSLR and Skechers SKX that have low leverage. Choosing them can shield investors from incurring huge losses in times of crisis.

Now, before selecting low-leverage stocks, let's explore what leverage is and how choosing a low-leverage stock helps investors.

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 start of the second-quarter earnings season, 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 23 stocks that made it through the screen.

Vital Farms: The company offers a range of produced pasture-raised foods, which include shell eggs, butter, hard-boiled eggs, ghee and liquid whole eggs. On Jun 26, 2024, Vital Farms revealed plans to expand its resilient supply chain with a second world-class egg washing and packing facility located in Seymour, IN. The new 72-acre facility will enable Vital Farms to continue growing its pasture-raised egg business and is expected to help generate more than $350 million in additional revenues.

VITL delivered an average four-quarter earnings surprise of 102.10%. It currently sports a Zacks Rank #1. The Zacks Consensus Estimate for VITL's 2024 sales suggests a solid 22.6% improvement from the 2023 reported figure.

Donaldson: It is engaged in the manufacturing and sale of filtration systems and replacement parts across the world. On Jul 3, 2024, Donaldson announced that through Its Univercells Technologies business, the company has expanded its relationship with the Gene Therapy Program at the University of Pennsylvania to evaluate certain bioreactors for scalable gene therapy production. Univercells Technologies developed the scale-X bioreactor, which was originally designed to lower the cost of viral vaccine production for critical public health vaccines. It is now being applied to enable viral vector accessibility for gene therapies.

DCI currently holds a Zacks Rank #2. The company boasts a long-term earnings growth rate of 10.5%. The Zacks Consensus Estimate for DCI's 2024 sales suggests a 4.6% improvement from the 2023 reported quarter.

Atmos Energy: It is engaged in regulated natural gas distribution and storage business. On May 8, 2024, Atmos Energy announced second-quarter fiscal 2024 results. Its earnings per share came in at $4.93, higher than the year-ago quarter's level of $4.40.

The company boasts a long-term earnings growth rate of 7%. The Zacks Consensus Estimate for ATO's fiscal 2024 sales implies an increase of 9.4% from fiscal 2023 sales. ATO currently carries a Zacks Rank #2.

First Solar: It is a leading global provider of comprehensive photovoltaic (PV) solar energy solutions and specializes in designing, manufacturing, and selling solar electric power modules using a proprietary thin-film semiconductor technology. On Jun 4, 2024, First Solar revealed that its Series 6 Plus and Series 7 TR1 products are the world's first PV solar modules to achieve the EPEAT Climate+ designation. This makes FSLR's modules the first to meet the global standard of ultra-low carbon threshold of less-than-equal-to 400 kg CO2e/kWp.

FSLR currently carries a Zacks Rank #2. The Zacks Consensus Estimate for 2024 sales implies an improvement of 36.5% from the 2023 reported sales figure. FSLR has a long-term earnings growth rate of 56.2%.

Skechers: It designs, develops, markets, and distributes footwear for men, women, and children in the United States and overseas under the SKECHERS name, as well as under several unique brand names. On Jul 4, 2024, Skechers announced that Mohammed Kudus, the Ghana national football team player, has been signed on as a Skechers athlete and is set to appear in multiplatform marketing campaigns supporting Skechers Football.

SKX currently holds a Zacks Rank #2. The company boasts a long-term earnings growth rate of 17.2%. The Zacks Consensus Estimate for SKX's 2024 sales suggests a 10.6% improvement from the 2023 reported figure.

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.

To read this article on Zacks.com click here.