Identifying stocks that offer attractive returns may sometimes be tricky for investors. In such scenarios, one may consider liquidity levels that are a good indicator of a company’s financial health.
Liquidity measures a company’s ability to meet short-term debt obligations by converting assets into liquid cash and equivalents. These stocks have always been on investors’ radar owing to their potential to offer alluring returns.
Nonetheless, one should be careful about investing in a stock with high liquidity level as it may also suggest that the company is not able to utilize assets effectively. Therefore, it is advisable to consider a company’s efficiency level along with liquidity to identify probable 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. Thus, 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 to 3 is considered ideal.
Quick Ratio: Unlike current ratio, quick ratio — also called “acid-test ratio” or “quick assets ratio” — indicates a company’s ability to pay short-term obligations. It considers inventory excluding current assets relative to current liabilities. Like the current ratio, a quick ratio of greater 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 to sound financials, a higher number may indicate inefficiency in cash utilization.
So, a ratio greater than 1 is desirable at all times but may not always appropriately represent a company’s financial condition.
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 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.
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 13
Here are five of the 13 stocks that qualified the screen:
Headquartered in Goleta, CA, Deckers Outdoor Corporation DECK is a leading designer, producer, and brand manager of innovative, niche footwear and accessories developed for outdoor sports as well as other lifestyle-related activities. The company sell products primarily under five proprietary brands — UGG, HOKA, Teva, Sanuk, and Koolaburra. The Zacks Consensus Estimate for fiscal 2022 earnings is pegged at $15.65 per share, up 5.3% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 1,136%, on average.
Based in Baltimore, MD, Medifast MED is a prominent manufacturer and distributor of clinically proven healthy living products and programs. The company produces, distributes and sells weight loss, weight management and healthy living products through its direct online channels as well as franchise weight control centers. The Zacks Consensus Estimate for 2021 earnings is pegged at $13.83 per share, up 2.7% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 16%, on average.
Providence, RI-based Textron TXT is a global multi-industry company that manufactures aircraft, automotive engine components and industrial tools. It also offers solutions and services for aircraft, fastening systems as well as industrial products and components. Its products include commercial and military helicopters, light- and mid-size business jets, plastic fuel tanks, automotive trim products, golf carts and utility vehicles, turf-car equipment, industrial pumps and gears, engineered fastening systems and solutions as well as other industrial products. The Zacks Consensus Estimate for 2021 earnings is pegged at $3.28 per share, up 4.5% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 37.4%, on average.
Headquartered in Norwalk, CT, Terex Corporation TEX is a global manufacturer of aerial work platforms, materials processing machinery and cranes. It designs, builds and supports products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. The company’s manufacturing facilities are located in the United States, Canada, Europe, Australia, Asia and South America. The Zacks Consensus Estimate for 2021 earnings is pegged at $3.00 per share, up 18.1% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 307.3%, on average.
Based in Santa Barbara, CA, Sonos SONO is a consumer electronics company that is mainly 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 largely 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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Textron Inc. (TXT) : Free Stock Analysis Report
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MEDIFAST INC (MED) : Free Stock Analysis Report
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