A company with favorable liquidity has the potential to provide impressive returns as liquidity supports its business growth.
Liquidity indicates a company’s ability to clear debt obligations by converting its assets into liquid cash and equivalents. However, one should be careful about investing in a stock with high liquidity level as it may also imply that the company is failing to utilize its assets competently.
Therefore, it is advisable to consider a company’s efficiency level in addition to its liquidity for identifying potential winners. An efficient company with a favorable liquidity level may prove to be a lucrative addition to one’s portfolio.
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 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 current ratio, quick ratio — also called “acid-test ratio” or “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 of 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 appropriately represent a company’s financial condition.
Screening Parameters
In order 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 criterias. 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.
In order 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 of 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 15
Here are five of the 15 stocks that qualified the screen:
Headquartered in New Albany, OH,
Abercrombie & Fitch
ANF
is a specialty retailer of premium, high-quality casual apparel for men, women and kids. The company conducts its business through a network of around 850 stores across North America, Asia, Europe and the Middle East. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $4.40 per share, up 33.3% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 510.9%, on average.
Headquartered in Birmingham, AL,
Hibbett
HIBB
, known earlier as Hibbett Sports, Inc, has evolved its offerings from sports goods to an athletic-inspired fashion assortment. The company’s new corporate identity better reflects on such transitions and highlights its consumer-centric Toe-to-Head focus that caters to trending footwear as well as establishes cross-category connectivity with apparel and accessory offerings. The company provides products for individual as well as team sports across several stores and its omni-channel platform. The Zacks Consensus Estimate for fiscal 2022 earnings is pegged at $11.30 per share, up 26.3% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 124.6%, on average.
Based in Palo Alto, CA,
Tesla
TSLA
is the market leader in battery-powered electric car sales in the United States, owning around 60% of market share. In fact, the company’s flagship Model 3 accounts for about half of the U.S. EV market. Tesla, which has managed to garner the reputation of a gold standard over the years, is now a far bigger entity than what it started off since its IPO in 2010, with a market capitalization almost double the combined value of top two U.S. auto giants General Motors and Ford. The Zacks Consensus Estimate for 2021 earnings is pegged at $5.23 per share, up 4.6% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 26.5%, on average.
St. Louis, MO-based
Arch Resources
ARCH
is one of the largest coal producers in the United States, operating nine mines across the major coal basins of the country. The locations of its mines and access to export facilities enable the company to ship coal worldwide. During the year ended Dec 31, 2020, it sold nearly 63 million tons of coal, including 0.9 million tons purchased from the third parties. The Zacks Consensus Estimate for 2021 earnings is pegged at $13.27 per share, up 55.2% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 5.4%, on average.
Based in Santa Barbara, CA,
Sonos
SONO
is a consumer electronics company. It is primarily involved in the manufacturing of smart speakers with immersive sound experience. The company leverages evolving consumer technology and entertainment trends to meet the audio consumption patterns of customers that is primarily characterized by fast-tracked adoption of voice assistants and streaming services. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $1.11 per share, up 30.6% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 297.3%, 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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