5 Low Leverage Stocks to Buy as Rate Cut Expectations Fade

5 Low Leverage Stocks to Buy as Rate Cut Expectations Fade

Aparajita Dutta
7 min read
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Though the majority of U.S. stock indices ended in green on Feb 23, they lost the momentum that led to the high achieved on Feb 22, backed by Nvidia’s better-than-expected quarterly results. Most likely, the indices slipped on account of the market consensus that the Federal Reserve will not cut interest rates until at least June.

In such a situation, an investor might not feel confident enough about investing in the stock market. However, a prudent investor knows that this is the right time to buy stocks that are safe bets. To this end, we recommend stocks like Costco Wholesale COST, NiSource NI, Expro Group Holdings XPRO, Hawkins HWKN and Kirby KEX, which bear 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 exorbitant 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, which 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 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 lower debt-to-equity ratio reflects improved solvency for a company.

With the third-quarter earnings cycle progressing towards its last lap, 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.

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