Amid evolving macroeconomic conditions and persistent market volatility, investors should prioritize companies with sound fundamentals rather than make investment decisions based solely on stock price movements. Factors such as financial health, earnings performance and future growth prospects play a crucial role in determining a company's ability to navigate uncertain market conditions. In this context, stocks with strong interest coverage ratios deserve attention, as they reflect a company's ability to meet interest obligations and maintain financial flexibility.
Wall Street witnessed broad-based gains yesterday, supported by renewed buying interest in technology-related stocks. The Nasdaq Composite advanced 1.05% to settle at 26,702.86, while the S&P 500 gained 0.58% to finish at 7,757.17. Meanwhile, the Dow Jones Industrial Average increased 360.21 points, or 0.69%, closing at 52,856.09. The positive momentum across major benchmarks highlighted investor enthusiasm for technology-driven growth opportunities.
Meanwhile, monetary policy remains an important consideration for investors assessing the market outlook. As per market pundits, the Federal Reserve is widely expected to leave interest rates unchanged at its Oct. 27-28 meeting, maintaining the federal funds rate within the 3.75%-4.00% range. However, expectations of a rate hike in December suggest that borrowing costs could remain a key concern for businesses. Against this backdrop, identifying companies with robust interest coverage ratios could be a prudent investment approach, as their ability to comfortably service debt obligations may provide greater financial resilience amid market uncertainty.
Ralph Lauren Corporation RL, Stride, Inc. LRN, Clean Harbors, Inc. CLH and Vertiv Holdings Co. VRT stand out for their strong interest coverage ratios.
Why Interest Coverage Ratio?
The interest coverage ratio shows how well a company can cover interest payments on its debt.
Debt, which many companies use to finance operations, comes at a cost called interest. Interest expense directly affects a company’s profitability. A company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is an important criterion to consider before making any investment decision.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
The interest coverage ratio indicates how many times interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio below 1 suggests that the company is unable to meet its interest obligations and could default on debt repayment. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over time.
The Winning 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 with 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 of the 24 stocks that qualified the screening:
Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2 and has a VGM Score of B. RL has a trailing four-quarter earnings surprise of 8.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Ralph Lauren’s current financial-year sales and EPS calls for growth of 7.6% and 13.3%, respectively, from the year-ago period. The stock has jumped 13.2% over the past year.
Stride, one of the nation's most successful technology-based education companies, carries a Zacks Rank #2 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 7.2%, on average.
The Zacks Consensus Estimate for Stride’s current financial-year sales and EPS indicates growth of 1.1% and 4.1%, respectively, from the year-ago period. The stock has fallen 49.7% over the past year.
Clean Harbors, a leading provider of environmental and industrial services throughout North America, carries a Zacks Rank #2 and VGM Score of A. The company has a trailing four-quarter earnings surprise of 4%, on average.
The Zacks Consensus Estimate for Clean Harbors’ current financial-year sales and EPS suggests growth of 9.1% and 36.5%, respectively, from the year-ago period. The stock has advanced 31.1% over the past year.
Vertiv Holdings, a global leader in critical digital infrastructure, carries a Zacks Rank #2 and has a VGM Score of B. VRT has a trailing four-quarter earnings surprise of 12.6%, on average.
The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS calls for growth of 36.8% and 59.1%, respectively, from the year-ago period. The stock has gained 15.8% over the past year.
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Ralph Lauren Corporation (RL): Free Stock Analysis Report
Clean Harbors, Inc. (CLH): Free Stock Analysis Report
Stride, Inc. (LRN): Free Stock Analysis Report
Vertiv Holdings Co. (VRT): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).