Building a portfolio comprising stocks with favorable liquidity is the way to go for investors seeking healthy returns.
Liquidity is a measure of a company’s capability to meet its short-term debt obligations. Thus, companies boasting impressive liquidity positions may be considered to have solid financial health.
However, one should be careful about investing in a stock with high liquidity level as it may also indicate that the company is failing to utilize assets efficiently.
Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock. An efficient company with a favorable liquidity level may prove to be a profitable addition to one’s portfolio.
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.
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 eight.
Here are five of the eight stocks that qualified the screen:
Domiciled in Lynnwood, WA, Zumiez Inc. ZUMZ is one of the leading global lifestyle retailers. The company through its distinctive brand offering and diverse product selection has carved a niche in the rapidly changing apparel industry. The Zacks Consensus Estimate for its fiscal 2020 earnings has been revised upward by 59.9% to $2.51 in the past 30 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 41.23%, on average.
Headquartered in Columbus, OH, Installed Building Products, Inc. IBP is a notable company in the building products and equipment space. It offers solutions involving the installation of insulation, fire-stopping, fireproofing, waterproofing, garage doors, rain gutters, shower doors, window blinds, closet shelving and mirrors, and other products across the continental United States. The Zacks Consensus Estimate for its current-year earnings has been revised upward by 8.3% to $4.16 in the past 30 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 23.34%, on average.
Carle Place, NY-based, 1-800-FLOWERS.COM, Inc. FLWS is an e-commerce provider of floral products and gifts. The Zacks Consensus Estimate for fiscal 2021 earnings has been revised upward by 29.3% to $1.06 over the past 60 days. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 14.72%, on average.
Headquartered in Baltimore, MD, Medifast, Inc. MED manufactures and distributes weight loss, weight management, healthy living products, and other consumable health and nutritional products. The Zacks Consensus Estimate for its current-year earnings has been revised upward by 23.8% over the last 60 days to $8.78 per share. The company has a Growth Score of A. It has a trailing four-quarter earnings surprise of 15.8%, on average.
Provo, UT-based, Nu Skin Enterprises, Inc. NUS develops and distributes a wide range of premium cosmetics, beauty, personal care and wellness products. While the company specializes in beauty and personal care, it also provides a wide range of nutritional products. The Zacks Consensus Estimate for its current-year earnings has been revised upward by 23.9% to $3.01 in the past 60 days. The company has a Growth Score of B. It has a trailing four-quarter earnings surprise of 18.71%, on average.
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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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Zumiez Inc. (ZUMZ) : Free Stock Analysis Report
Nu Skin Enterprises, Inc. (NUS) : Free Stock Analysis Report
1800 FLOWERS.COM, Inc. (FLWS) : Free Stock Analysis Report
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MEDIFAST INC (MED) : Free Stock Analysis Report
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