The nation is now in a government shutdown as the battle over federal budget and debt-ceiling galvanizes and shows no sign of a favorable outcome. The existing federal budget runs out of money today and the debt ceiling expires in about two weeks, but still no negotiations are in sight.
By midnight, Congress must endorse the bill voted (231-192) by the Republican-led House in a rare Sunday session, primarily to delay implementation of the Affordable Care Act by one year. While time is running out, President Obama still sticks to non-acceptance of Republican demands.
On the ceiling front, Obama and Senate Democrats also vowed non-acceptance of opponent demands. The House Republicans are claiming certain priorities in return for their approval of raising the nation's borrowing limit. But the Obama administration is even unwilling to sit at the negotiation table.
This disagreement in raising the debt ceiling carries intense economic implications as the government will not be able to meet its financial obligations, including interest payments on debt. As the Congressional battle continues in full swing, the end results of a government shutdown likely include a rating downgrade of the nation similar to Standard & Poor’s grade cut a couple of years back or a debt crisis. Whatever the case, the battle is now bad enough to jeopardize the improving market sentiment.
Primarily, the debt ceiling issue could make borrowing expensive for the U.S. firms, thereby throttling their business activities and depressing stock prices. However, you can turn the odds in your favor by investing in stocks that are well positioned to combat this situation and move ahead. These stocks are bound to plunge if the border market crushes, but their recovery will be quicker than others.
Before suggesting a few rewarding stocks of that category, let’s get the hang of the method to track them.
Prioritize Low Leveraged Stocks
You must check the financial leverage of a company before investing in it. Companies with low financial leverage can recover faster as these depend less on external borrowings for capital expenditures. So companies with very small debt-to-equity ratios should fare well, even if the market faces a debt crunch.
Look for Reinvestment Ability
Earnings power is a key factor in this strategy. Low-leveraged companies that are able to generate higher profits on each dollar of sale should have the flexibility to reinvest in their operations. So a healthy operating margin is necessary to reduce dependence on the debt market.
Bank on Effective Equity Utilization
Analyzing the efficacy of employed investor money should be the next step in narrowing down your choice. Companies with higher return on equity ratio (ROE) indicate better utilization of equity base to generate earnings performance.
Confirm Your Choice with the Zacks Rank
A good way to finalize your choice is to look at the stock’s Zacks Rank. If you see that your target stock holds a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy), betting on that should not disappoint. (To learn more about the Zacks Rank, visit our Zacks Rank Education section.)
3 Stocks Ready to Endure Debt Crisis
I ran a screen on Research Wizard for companies with the following parameters:
- Debt-to-equity ratio less than 1%: This captures stocks that have a low degree of financial leverage.
- Operating margin greater than or equal to 35%: This identifies those stocks that have the flexibility to reinvest their pure profits as their costs are under control.
- ROE greater than or equal to 25%: This picks out stocks that are generating over 25% earnings annually by utilizing their equity base.
- Zacks Rank less than or equal to 2: This ascertains stocks that have shown above-average returns over the last 26 years. (See the performance of Zacks’ portfolios and strategies here: About Zacks Performance).
Here are the top 3 stocks among the 7 that made it through this screen:
FleetCor Technologies, Inc. (NYSE:FLT): Headquartered in Norcross, Georgia, this provider of fuel cards and workforce payment products is my best choice.
Debt-to-equity ratio = 0.46%
Operating margin = 35.2%
Trailing 12-month ROE = 28.5%
FleetCor will also likely deliver a positive earnings surprise when it releases third-quarter earnings on Nov 4, as it has a combination of Earnings ESP of +1.06% and a Zacks Rank of #1.
Jazz Pharmaceuticals (NASDAQ:JAZZ): This specialty biopharmaceutical company is my second choice. The company is headquartered in Dublin, Ireland and currently carries a Zacks Rank #2.
Debt-to-equity ratio = 0.47%
Operating margin = 40.7%
Trailing 12-month ROE = 28.6%
Pioneer Southwest Energy Partners L.P. (PSE): Based in Irving, Texas, this developer of oil and gas properties comes as my third choice.
Debt-to-equity ratio = 0.65%
Operating margin = 36.9%
Trailing 12-month ROE = 27.2%
Also, Pioneer Southwest is expected to deliver a positive earnings surprise in the third quarter, as it has a favorable combination of Earnings ESP of +5.26% and a Zacks Rank of 2.
Don’t Be Scared of a Dip
These stocks are well positioned to deal with a debt crisis, but are bound to drop if the market crashes on heightened political drama. So these stocks may offer you a better entry point. In any case, these stocks will recover faster and better than others due to their self-sufficient sources of funding. However, a significant slump is a hint for staying away from buying them.
Also, it is safe to dig a little deepper into these stocks’ fundamentals that assure long-term gains. Let’s wait and see where the political battle ends up, but be prepared with this investment strategy.
Disclosure: The author has no positions in any stocks mentioned.