Investors seem to be nervous and are treading Wall Street with utmost caution as worries about a possible recession loom large. Experts fear that the Fed’s hawkish stance to tame inflation might push the economy into a recession. However, Fed Chairman Jerome Powell’s recent comment about lowering the magnitude of the rate hike from December has come as a breather. Meanwhile, a favorable reading on the Consumer Price Index front as well as a better-than-expected jobs report in November adds to the positive sentiment.
Given the current scenario, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. You can simply arrive at a decision to buy or sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always warrant superior returns when the market is facing myriad issues. A critical analysis of the company’s financial background is always required for a better investment decision.
Well, a company should be sound enough to meet its financial obligations. This can be judged with coverage ratios — the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio called the interest coverage ratio.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Sprouts Farmers Market, Inc.
SFM
,
Fortinet, Inc.
FTNT
,
O’Reilly Automotive, Inc.
ORLY
and
Gilead Sciences, Inc.
GILD
are four stocks with an impressive interest coverage ratio.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.
Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profits of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
The interest coverage ratio suggests the number of times interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.
An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardship. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
What’s the Strategy?
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a
VGM Score
of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5:
The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median:
Stocks that have a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median:
This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000:
A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2:
Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to 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.
Here are four picks out of the seven stocks that qualified the screening:
Sprouts Farmers
, which offers fresh, natural, and organic food products in the United States, carries a Zacks Rank #2 and has a VGM Score of A. Its expected EPS growth rate for three-five years is 10.4%. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
The Zacks Consensus Estimate for Sprouts Farmers’ current financial year sales and EPS suggests growth of 4.6% and 11%, respectively, from the year-ago period. SFM has a trailing four-quarter earnings surprise of 10%, on average. The stock has rallied 23% in the past year.
Fortinet
, a global leader in broad, integrated and automated cybersecurity solutions, carries a Zacks Rank #2 and has a VGM Score of B. The expected EPS growth rate for three-five years is 18%.
The Zacks Consensus Estimate for Fortinet’s current financial year sales and EPS suggests growth of 32.5% and 43.8%, respectively, from the year-ago period. Fortinet has a trailing four-quarter earnings surprise of 14.6%, on average. The stock has declined 21.4% in the past year.
O’Reilly Automotive
, which operates as a retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 13%.
The Zacks Consensus Estimate for O’Reilly Automotive’s current financial year sales and EPS suggests growth of 6.8% and 5.1%, respectively, from the year-ago period. ORLY has a trailing four-quarter earnings surprise of 7.5%, on average. The stock has risen 23.2% in the past year.
Gilead Sciences
, a biopharmaceutical company, carries a Zacks Rank #2 and has a VGM Score of A. The expected EPS growth rate for three-five years is 15.7%.
Gilead Sciences has a trailing four-quarter earnings surprise of 0.4%, on average. The stock has appreciated 24.6% in the past year.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and backtest them first before taking the investment plunge.
The Research Wizard is a great place to begin. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today
.
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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