Investors looking for high returns are likely to benefit from adding stocks with robust liquidity levels as liquidity supports business growth.
Liquidity primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents. These stocks have always been on investors’ radar, owing to their potential to provide strong returns.
One should be alert before investing in such stocks. While a high liquidity level may imply that the company is clearing its dues at a faster rate compared with peers, it may also suggest that the company is unable to utilize its assets competently.
Hence, one may consider a company’s efficiency level in addition to its liquidity for identifying potential winners.
Measures to Identify Liquid Stocks
Current Ratio
: It measures current assets relative to current liabilities. This ratio is used for measuring a company’s potential to meet short- and long-term debt obligations. A current ratio — also known as the working capital ratio — below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company is in good financial shape. It may also indicate that the company failed to utilize its assets significantly. Hence, a range of 1-3 is considered ideal.
Quick Ratio
: Unlike the current ratio, the quick ratio — also called the “acid-test ratio” or the “quick assets ratio” — reflects on a company’s ability to pay short-term obligations. It considers inventory excluding the current assets relative to current liabilities. Like the current ratio, a quick ratio of more than 1 is desirable.
Cash Ratio
: This is the most conservative ratio among the three, as it takes into account cash and cash equivalents as well as invested funds relative to current liabilities. It measures a company’s ability to meet current debt obligations using the most liquid assets. Though a cash ratio of more than 1 may point toward sound financials, a higher number may indicate inefficiency in cash utilization.
A ratio greater than 1 is desirable at all times but may not always represent a company’s financial condition.
Screening Parameters
To pick the best of the lot, we have added asset utilization — a widely-used measure of a company’s efficiency — as one of the screening criteria. Asset utilization is the ratio of total sales in the past 12 months to the last four-quarter average of total assets. Though this ratio varies across industries, companies with a ratio higher than their respective industries can be considered efficient.
To ensure that these liquid and efficient stocks have solid growth potential, we have added our proprietary
Growth Style Score
to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3
(While liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization greater than industry average
(Higher asset utilization than the industry average indicates a company’s efficiency.)
Zacks Rank equal to #1
(Only Strong Buy-rated stocks can get through). You can see
the complete list of today’s Zacks #1 Rank stocks here.
Growth Score less than or equal to B
(Back-tested results show that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 or 2 handily beat other stocks.)
These criteria have narrowed down the universe of more than 7,700 stocks to only 12.
Here are four of the 12 stocks that qualified the screen:
Headquartered in Menomonee Falls, WI,
Kohl’s Corporation
KSS
is a U.S.-based department store chain that operates specialty department stores and an e-commerce site in the United States. These offer moderately-priced apparel, footwear and accessories for women, men and children, beauty and home articles. Kohl’s appeals to middle-class consumers as it sells discounted branded and private label clothing and home goods. As of Oct 30, 2021, Kohl’s operated more than 1,100 stores across 49 states, as well as online at Kohl’s.com and on the Kohl’s app. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $7.30 per share, up 21.1% in the past 60 days. Kohl’s has a Growth Score of A and a trailing four-quarter earnings surprise of 114.5%, on average.
Based in Austin, TX,
Tesla
TSLA
is the market leader in battery-powered electric car sales in the United States, owning around 60% of the market share. The company’s flagship Model 3 accounts for about half of the U.S. EV market. Tesla, which has garnered the reputation of a gold standard over the years, is now a bigger entity than what it was during its IPO in 2010, with a market capitalization almost double the combined value of the top two U.S. auto giants — General Motors and Ford. The Zacks Consensus Estimate for 2021 earnings is pegged at $5.98 per share, up 11.6% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 25.4%, on average.
Based in Houston, TX,
ConocoPhillips
COP
is involved in the exploration and production of oil and natural gas. Considering proved reserves and production, the company is the largest explorer and producer in the world. ConocoPhillips’ low-risk and cost-effective operations are spread across North America, Asia, Australia and Europe. The upstream energy player also has a foothold in Canada’s oil sand resources and exposure to the developments related to liquefied natural gas (LNG). The Zacks Consensus Estimate for 2021 earnings is pegged at $5.97 per share, up 16.8% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 13%, on average.
Based in Forest City, IA,
Winnebago Industries
WGO
is a leading producer of recreational vehicles in the United States. The motorhomes or RVs are made in the company’s vertically-integrated manufacturing facilities in Iowa, while the travel trailer and fifth wheel trailers are produced in Indiana. Winnebago distributes its RV and marine products through independent dealers across the United States and Canada. The company produces and sells conventional travel trailers and fifth wheels under the Winnebago and Grand Design brands. It manufactures and sells Motorhomes under the Winnebago and Newmar brand names. Premium quality boats are built and sold under its Chris-Craft and Barletta brands through an established network of independent authorized dealers. The Zacks Consensus Estimate for fiscal 2022 earnings is pegged at $9.40 per share, up 15.5% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 42.3%, on average.
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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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