Identifying stocks that yield attractive returns may sometimes be tricky for investors. To look for such stocks, one may consider liquidity levels that are a good measure of a company’s financial health.
Liquidity indicates 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 healthy returns. Nonetheless, investors need to be cautious before adding such stocks to their investment portfolio. While a high liquidity level may imply that the company is clearing its dues at a faster rate compared with peers, it may be a sign that it is unable to efficiently utilize its assets/resources. Therefore, it is advisable to consider a company’s efficiency level in addition to its liquidity for identifying 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 mean that the company has 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 only cash and cash equivalents as well as invested funds relative to current liabilities. It measures a company’s ability to meet its 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. 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 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: Mountain View, CA-based Intuit ( INTU Quick Quote INTU - Free Report) is a business and financial software company that develops and sells financial, accounting and tax preparation software as well as related services for small businesses, consumers and accounting professionals, worldwide. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $9.35 per share, up 11% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 49.7%, on average. Based in Omaha, NE, Lindsay Corporation ( LNN Quick Quote LNN - Free Report) provides a variety of proprietary water management and road infrastructure products and services. The company sells its irrigation products primarily to a world-wide independent dealer network, who resell to their customers, the farmers. The company’s primary production facilities are located in the United States. The Zacks Consensus Estimate for fiscal 2021 earnings is pegged at $4.18 per share, up 16.4% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 11.9%, on average. Headquartered in Houston, TX, Magnolia Oil & Gas ( MGY Quick Quote MGY - Free Report) is an independent upstream operator engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. The company is focused on the Eagle Ford Shale and Austin Chalk formations in South Texas. The Zacks Consensus Estimate for 2021 earnings is pegged at $1.34 per share, up 0.8% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 22.9%, on average. Based in Beaverton, OR, NIKE ( NKE Quick Quote NKE - Free Report) specializes in design, development and marketing of athletic footwear, apparel, equipment and accessories as well as services for men, women and children worldwide. With the help of a strong brand portfolio, including Nike Pro, Nike Golf, Nike+ and Air Jordan, it offers premium, well-designed and high-quality products. The Zacks Consensus Estimate for its fiscal 2022 earnings is pegged at $4.25 per share, up 10.1% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 56%, on average. Headquartered in Oklahoma City, OK, Devon Energy Corporation ( DVN Quick Quote DVN - Free Report) is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas. The company’s oil and gas operations are mainly concentrated in the onshore areas of North America, primarily in the United States. The Zacks Consensus Estimate for its 2021 earnings is pegged at $2.43 per share, up 13% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 2.3%, on average. Get the remaining stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software. The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out. Click here to sign up for a free trial to the Research Wizard today. 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.