Creating a portfolio that includes stocks with favorable liquidity is likely to work out in favor of investors seeking healthy returns.
Liquidity is a measure of a company’s capability to meet its short-term debt obligations. Stocks with high liquidity levels have always been in demand, owing to their potential to provide maximum returns. One needs to exercise caution before investing in such stocks. A high liquidity level may indicate that the company is clearing its dues faster than its peers. However, it may also suggest that the company is not able to utilize its assets competently. Hence, an investor 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 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 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 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 12 Here are four of the 12 stocks that qualified the screen: St. Louis, MO-based Arch Resources ( ARCH Quick Quote ARCH - Free Report) 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 $20.80 per share, up 58.2% in the past 60 days. Arch Resources has a Growth Score of B and a trailing four-quarter earnings surprise of 11%, on average. Headquartered in Houston, TX, Magnolia Oil & Gas ( MGY Quick Quote MGY - Free Report) is an independent upstream operator engaged in exploring, developing and producing 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 its 2021 earnings is pegged at $2.37 per share, up 19.1% in the past 60 days. Magnolia Oil & Gas has a Growth Score of B and a trailing four-quarter earnings surprise of 37.2%, on average. Based in Houston, TX, ConocoPhillips ( COP Quick Quote COP - Free Report) 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 $5.87 per share, up 23.8% 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 Quick Quote WGO - Free Report) 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 throughout the United States and Canada. The company produces and sells conventional travel trailers and fifth wheels under the Winnebago and Grand Design brand names. 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 $9.56 per share, up 17.2% 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. 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.