Investors looking for high returns will likely 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 faster than its peers, it may also suggest that the company is unable to utilize its assets competently.
Hence, one may consider a company’s efficiency level along with its liquidity to identify potential winners.
Measures to Identify Liquid Stocks Current Ratio: It measures current assets relative to current liabilities. The 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 suggest that the company is in good financial shape. It may also suggest 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" — indicates 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 considers cash and cash equivalents and 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 suggest 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.
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 the 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 17.
Here are four of the 17 stocks that qualified for the screen:
San Jose, CA-based
Cadence Design Systems ( CDNS Quick Quote CDNS - Free Report) offers products and tools that help customers design electronic products. Cadence’s core electronic design automation or EDA software and services enable engineers to develop different types of integrated circuits. Cadence is well-positioned for growth driven by its expanding product portfolio and strong demand for products from existing and emerging markets. The company recently reported strong first-quarter 2022 results, with revenues increasing 23% on a year-over-year basis. Driven by strong first-quarter results, the company now expects revenues for the full year in the range of $3.395-$3.435 billion compared with the earlier guidance of $3.32-$3.38 billion. The Zacks Consensus Estimate for 2022 earnings is pegged at $3.89 per share, up 4.3% in the past 60 days. CDNS has a Growth Score of B and a trailing four-quarter earnings surprise of 10.6%, on average
Buckle ( BKE Quick Quote BKE - Free Report) is a well-known retailer that sells several brands and private label casual apparel, including tops, denim and other casual bottoms, sportswear, outerwear, accessories and footwear. Buckle emphasizes on personalized attention to its clients and offers individual customer services like free alterations, layaways and a loyalty program. The Zacks Consensus Estimate for its fiscal 2022 earnings is pegged at $5.25 per share, up 10.3% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 45%, 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 2022 earnings is pegged at $4.27 per share, up 53.6% in the past 60 days. Magnolia Oil & Gas has a Growth Score of B and a trailing four-quarter earnings surprise of 18.5%, on average.
Based in Nashville, TN,
Louisiana-Pacific Corporation ( LPX Quick Quote LPX - Free Report) is a leading manufacturer of sustainable, quality engineered wood building materials, structural framing products as well as exterior siding for residential, industrial and light commercial construction. The company operates 20 modern, strategically located facilities in the United States and Canada, two facilities in Chile and a facility in Brazil. It also operates facilities through a joint venture. The company’s products are used primarily in new home construction, repair and remodeling and outdoor structures. The company is reaping benefits from solid demand from the U.S. residential market. Strategic business transformation, effective cash management and inorganic moves are likely to boost performance in the future. The Zacks Consensus Estimate for 2022 earnings is pegged at $14.87 per share, up 25.3% in the past 60 days. Louisiana-Pacific has a Growth Score of B and a trailing four-quarter earnings surprise of 14%, on average.
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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.