The U.S. stock market seems to be on a high right now on account of the dynamic market conditions that have been prevailing across the globe for the past few days. Two factors – reduced risk of euro dissolution in the wake of market-preferred French election results and hopes for a corporate tax cut by Trump – are driving the equity market rally.

The global equity markets picked up pace at the beginning of the week as the first round of the French presidential election went in favor of Emmanuel Macron. On the other hand, U.S. President Trump’s promise to cut corporate tax by 20% and to impose a 10% tax on foreign earnings in repatriation, boosted market sentiments.

On top of that, Federal Reserve chairperson, Janet Yellen’s consistent claim that the U.S. economy is growing “pretty healthy”, leads to more optimism. All these factors set the stage for investment in U.S. stocks.

However, analysts remain concerned about low productivity growth and sluggish consumer spending. Besides, following Trump’s failure to repeal Obamacare, a few are skeptical about the implementation of the corporate tax cut.

Therefore, it is better to be safe than sorry and invest in less risky stocks. Considering the fact that uncertainty can hit equity market any time, it is better to avoid highly leveraged stocks as they are the most vulnerable ones at times of volatility.  

So investors must look for stocks that are less leveraged, as only a few fortunate ones can totally escape from debt financing. Herein comes the use of financial leverage ratio, which helps one to identify highly leveraged stocks. One of the most popular leverage ratios is the debt-to-equity ratio.

Analyzing Debt-to-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 implies a more financially stable business, thereby making it a more worthy investment opportunity.

With the first–quarter reporting cycle in full swing, the earnings growth picture seems to be improving from the preceding quarter. In fact, growth this reporting season is expected to hit the highest level in the last three years.  However, to be on the safer side, we urge investors to go for low leverage stocks instead of targeting growth stocks.  After all, low leverage stocks are financially more secure and immune to market upheavals.

The Winning Strategy

Considering the aforementioned discussion, it is imperative for a sensible investor to choose stocks that have a low debt-to-equity ratio.

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.

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.

Estimated One-Year EPS Growth F(1)/F(0) greater than 5: This shows earnings growth expectation.

Zacks Rank #1 (Strong Buy) or #2 (Buy): No matter whether market conditions are good or bad, stocks with a Zacks Rank #1 or 2 have a proven history of success.

VGMScore of A or B: Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.

Excluding stocks that have a negative or a zero debt-to-equity ratio, here are five of the 16 stocks that made it through the screen.

Darden Restaurants, Inc. (DRI - Free Report) : This company is the world's largest casual dining restaurant and engages in the ownership and operation of casual dining restaurants in the U.S. and Canada. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 3.35% in the trailing four quarters.

Louisiana-Pacific Corporation (LPX - Free Report) : It manufactures and sells building products primarily for use in new home construction, repair and remodeling, and outdoor structures, as well as light industrial and commercial construction. The company carries a Zacks Rank #1 and witnessed an average positive earnings surprise of 66.28% in the trailing four quarters.

Anthem, Inc. (ANTM - Free Report) : This corporation operates as a health benefits company in the U.S. It witnessed an average positive earnings surprise of 3.86% in the trailing four quarters and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Ingalls Industries, Inc. (HII - Free Report) : This largest ship builder in the U.S. engages in designing, building, overhauling, and repairing of ships. It carries a Zacks Rank #2 and witnessed an average positive earnings surprise of 19.85% in the trailing four quarters.

Arrow Electronics, Inc. (ARW - Free Report) : The company provides products, services, and solutions to industrial and commercial users of electronic components and enterprise computing solutions worldwide. It carries a Zacks Rank #2 and reported a positive earnings surprise of 1.09% last quarter.