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 to identify 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’ — 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, considering 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 the universe of more than 7,700 stocks to only 11
Here are four of the 11 stocks that qualified for the screen:
Perion Network ( PERI Quick Quote PERI - Free Report) is an Israel-based technology company that offers brands and publishers online advertising and search monetization solutions. 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 $2.20 per share, up 10% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 27.8%, on average. WhiteHorse Finance ( WHF Quick Quote WHF - Free Report) is a business development company focused on originating loans to privately held small-cap companies across various industries. The company recently reported results for the third quarter of 2022, with Net Asset Value amounting to $343 million or $14.76 per share. The company also announced a distribution of $0.355 per share for the fourth quarter, payable on Jan 4, 2023, to stockholders of record as of Dec 21, 2022. The Zacks Consensus Estimate for its 2022 bottom line is pegged at $1.55 per share, up 4.7% in the past 60 days. The company has a Growth Score of B. U.S. Silica Holdings ( SLCA Quick Quote SLCA - Free Report) makes and markets commercial silica, a specialized mineral, to various attractive end markets in the United States. The company is likely to gain from expansions in the Permian Basin. The Sandbox and EP Minerals buyouts are also expected to make significant contributions. The buyout of EP Minerals complements U.S. Silica’s Oil & Gas segment and provides a robust platform for growth and expansion. The buyout doubled the size of the Industrial business as well as an expanded distribution network, product offerings and global footprint. The Zacks Consensus Estimate for 2022 earnings is pegged at $1.09 per share, up 4.8% in the past 60 days. SLCA has a Growth Score of A and a trailing four-quarter earnings surprise of 48.2%, on average. Inter Parfums ( IPAR Quick Quote IPAR - Free Report) manufactures, distributes and markets a wide range of fragrances and related products. Inter Parfums continues to see solid momentum in its travel retail business. Considering the solid year-to-date performance and robust projections for the rest of the year, management raised its 2022 view during third-quarter earnings release. Management also expects growth in 2023, which is likely to be driven by a solid brand portfolio and global distribution network. The company is on track to expand its business through new licenses or buyouts. The Zacks Consensus Estimate for 2022 bottom line is pegged at $3.40 per share, up 4.3% in the past 60 days. IPAR has a Growth Score of A and a trailing four-quarter earnings surprise of 27.8%, 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.