4 Stocks to Buy With Strong Coverage Ratios Amid Middle East Tensions

An ill-informed investor can lose cash by wagering on a stock based only on the numbers flashing on a real-time trading screen. That’s why a deeper review of a company’s financial background is essential for smarter decisions, especially when the market is dealing with multiple crosscurrents. Major indexes closed lower on Friday amid ongoing Middle East tensions and rising oil prices.

Too often, investors gauge a company’s performance by looking only at headline sales or earnings. What these numbers don’t reveal is whether a company’s fundamentals are strong enough to meet its financial obligations in a tighter, more rate-sensitive environment. At its latest meeting, the Federal Reserve kept the benchmark interest rate unchanged at 3.5%-3.75% for the second consecutive time.

That’s where coverage ratios become invaluable. A higher coverage ratio signals a stronger capacity to service debt and sustain operations, making it a critical indicator of financial stability for investors seeking safer opportunities. Brinker International, Inc. EAT, Ralph Lauren Corporation RL, Philip Morris International Inc. PM and Vertiv Holdings Co VRT have impressive interest coverage ratios.

Why Interest Coverage Ratio?

The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.

Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability 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.

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.

The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.

An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. 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 14 stocks that qualified the screening:

Brinker International, one of the leading casual dining restaurant companies, sports a Zacks Rank #1 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Brinker International’s current financial-year sales and EPS calls for growth of 7.9% and 20%, respectively, from the year-ago period. The stock has declined 7% in the past year.

Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 9.7%, on average.

The Zacks Consensus Estimate for Ralph Lauren's current financial-year sales and EPS implies growth of 12.4% and 31.8%, respectively, from the year-ago period. RL has a VGM Score of B. The stock has soared 39.7% in the past year.

Philip Morris, a tobacco company, carries a Zacks Rank #2 and has a VGM Score of B. PM has a trailing four-quarter earnings surprise of 4.2%, on average.

The Zacks Consensus Estimate for Philip Morris’ current financial-year sales and EPS indicates growth of 8.2% and 12.6%, respectively, from the year-ago period. The stock has risen 7.6% in the past year.

Vertiv Holdings, a global leader in critical digital infrastructure, carries a Zacks Rank #2 and has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 11.8%, on average.

The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS suggests growth of 33.8% and 46.4%, respectively, from the year-ago period. The stock has surged 173.1% in the past year.

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Philip Morris International Inc. (PM): Free Stock Analysis Report

Brinker International, Inc. (EAT): Free Stock Analysis Report

Ralph Lauren Corporation (RL): Free Stock Analysis Report

Vertiv Holdings Co. (VRT): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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