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Check 4 Best Liquid Bets to Power Your Portfolio

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Liquidity of a stock is an important parameter that many investors tend to ignore. It primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents.

These stocks have always been in demand owing to their potential to provide maximum returns. However, one should be alert enough before investing in such stocks. While a high liquidity level may imply that the company is clearing its dues at a faster rate compared with peers, it may also indicate that the company is failing to use its assets competently.

Hence, one may consider a company’s efficiency level in addition to its liquidity for identifying prospective 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 both 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, and 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, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is the ratio of total sales over 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 seven.

Here are four of the seven stocks that qualified the screen:

Based in Luxembourg, MagnaChip Semiconductor Corp. MX designs, manufactures and sells analog and mixed-signal semiconductor platform solutions for communications, Internet of Things, consumer, industrial and automotive applications. The Zacks Consensus Estimate for 2020 earnings has moved 36.9% north to 89 cents in the past 60 days. The company has a Growth Score of A. It has a trailing four-quarter positive earnings surprise of 82.59%, on average.

Headquartered in San Francisco, CA, Dropbox, Inc. DBX is a provider of collaboration platform that enables users to organize workspace processes with cloud storage, personal cloud, file synchronization and other subscription-based premium services. The Zacks Consensus Estimate for 2020 earnings has been revised upward by 22.8% to 70 cents in the past 60 days. The company has a Growth Score of A and a trailing four-quarter positive earnings surprise of 31.04%, on average.

Fremont, CA-based Enphase Energy, Inc. (ENPH - Free Report) is a global energy technology company that delivers energy management technology for the solar industry. It designs, develops, manufactures and sells home energy solutions, which connect energy generation, energy storage and control and communications management on one intelligent platform. The Zacks Consensus Estimate for 2020 earnings has advanced 18.8% to $1.20 in the past 60 days. The company has a Growth Score of A and a trailing four-quarter positive earnings surprise of 34.16%, on average.

Domiciled in Bellingham, WA, eXp World Holdings Inc. EXPI is the holding company for eXp Realty and VirBELA. The company provides cloud-based real estate brokerage services primarily in the United States and Canada. The Zacks Consensus Estimate for 2020 bottom line has been revised to earnings of 1 cent from a loss of 8 cents in the past 60 days. The company has a Growth Score of A. Also, the estimates for current-year sales indicate an improvement of 46.2% year over year.

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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.


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