Investors seeking strong returns may allocate their assets to stocks with significant liquidity. Liquidity is an important yardstick that indicates a company's capability to meet debt obligations by converting assets into cash.
A company with a favorable liquidity position has potential to generate higher returns as liquidity drives growth.However, one should exercise caution before investing in such stocks. While a high liquidity level may imply that the company is meeting its obligations at a faster rate than its peers, it may also indicate that the company is failing to use its assets efficiently.
Hence, the efficiency level of a company should be considered in addition to its liquidity to identify potential winners as this combination indicates underlying financial strength.
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 four of the eight stocks that qualified the screen:
Domiciled in Chicago, IL, United States Cellular Corporation USM provides wireless service coverage for Telephone and Data Systems across select Midwest markets. The company has an attractive Growth Score of A and pulled off average four-quarter beat of 79.32%. The Zacks Consensus Estimate for 2019 earnings of $1.36 has moved 6.25% north in the last 30 days.
Headquartered in San Francisco, CA, Dropbox, Inc . DBX offers a platform, which enables users to store and share files, photos, videos, songs and spreadsheets. The company has a Growth Score of A and delivered average four-quarter positive surprise of 64.58%.The Zacks Consensus Estimate for 2019 earnings has been intact at 41cents in the last 30 days.
Newport Beach, CA-based Chipotle Mexican Grill Inc. CMG along with its subsidiaries operates quick-casual and fresh Mexican food restaurant chains. The company has a Growth Score of A and came up with average four-quarter positive earnings surprise of 11.99%. The Zacks Consensus Estimate for 2019 earnings of $13.01 has been revised a penny upward in the last 30 days.
Based in Long Beach, CA, Molina Healthcare, Inc. MOH is a provider of government sponsored plans, namely Medicare and Medicaid. The company has a Growth Score of B and delivered average four-quarter positive surprise of 88.17%. The Zacks Consensus Estimate for fiscal 2019 earnings has been inched 0.2% up to $10.96 over the last 30 days.
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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 .
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Molina Healthcare, Inc (MOH): Free Stock Analysis Report Chipotle Mexican Grill, Inc. (CMG): Free Stock Analysis Report United States Cellular Corporation (USM): Free Stock Analysis Report Dropbox, Inc. (DBX): Free Stock Analysis Report To read this article on Zacks.com click here.