Creating a portfolio with favorable liquidity stocks is likely to work in favor of investors seeking healthy returns.
Liquidity measures 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. High liquidity may indicate that the company is clearing its dues faster than its peers. However, it may also suggest that the company cannot 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. The ratio gauges 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 firm 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" — reflects 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 always desirable 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 8.
Here are four of the eight stocks that qualified for the screen:
Foster City, CA-based
Qualys ( QLYS Quick Quote QLYS - Free Report) offers cloud security and compliance solutions that aid business organizations to identify security risks to their IT infrastructures and protect their IT systems and applications from cyber-attacks. The company's solutions are provided through its QualysGuard Cloud Platform. Qualys is gaining from the higher demand for security and networking products amid the pandemic as a massive global workforce continues to work remotely. Implementation of hybrid work model and accelerated digital transformations by organizations are also fueling demand for the company’s cloud-based security solutions. The Zacks Consensus Estimate for 2022 earnings has improved 8.6% to $3.15 per share in the past 60 days. Qualys has a Growth Score of A and a trailing four-quarter earnings surprise of 10%, on average.
Based in Plano, TX,
Diodes ( DIOD Quick Quote DIOD - Free Report) is a leading manufacturer and supplier of high-quality discrete and analog semiconductor products. The company caters to the communications, computing, industrial, consumer electronics and automotive markets. DIOD’s two manufacturing facilities are in Shanghai, China, while it has a wafer fabrication plant in Kansas City. Diodes’ strong product portfolio is helping it capitalize on high-growth opportunity areas like smart infrastructure, smartphones, 5G, IoT, home automation, cloud computing, server, storage, data centers, connected cars, embedded systems and precision controls. The Zacks Consensus Estimate for 2022 earnings is pegged at $6.93 per share, up 7.8% in the past 60 days. Diodes has a Growth Score of B and a trailing four-quarter earnings surprise of 9.2%, on average.
Southwest Airlines Co ( LUV Quick Quote LUV - Free Report) is a passenger airline service in the United States. Continued recovery in air-travel demand bodes well for Southwest Airlines. Anticipating improved bookings, the carrier is well-positioned to reap profits in the remaining three quarters of 2022. Fleet- modernization efforts of LUV are encouraging as well. At the end of the first quarter of 2022, Southwest Airlines had 722 Boeing 737 jets in its fleet. The carrier uses its fleet to serve 121 destinations across 11 countries (the United States and 10 near-international countries, including Dominican Republic, Mexico, Jamaica, The Bahamas, Aruba, Costa Rica, Belize, Cuba, the Cayman Islands and Caicos). The Zacks Consensus Estimate for 2022 earnings is pegged at $2.63 per share, up 119.2% in the past 60 days. LUV has a Growth Score of B and a trailing four-quarter earnings surprise of 33.5%, on average
Perion Network ( PERI Quick Quote PERI - Free Report) is a technology company that offers online advertising and search monetization solutions to brands and publishers. The company is committed to providing data-driven execution, from high-impact ad formats to branded search and a unified social and mobile programmatic platform. The Zacks Consensus Estimate for its 2022 earnings is pegged at $1.77 per share, up 50% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 34.7%, 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.