Creating a portfolio with stocks that have robust liquidity levels will likely favor investors seeking healthy returns, especially amid volatile market conditions.
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 levels 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 and 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.
Screening Parameters
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 higCurrent Ratio, Quick Ratio and Cash Ratio between 1 and 3h 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:
Inter Parfums IPAR manufactures, distributes and markets a wide array 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 the third-quarter earnings release. Management also expects growth in 2023, likely driven by a solid brand portfolio and global distribution network. The company is expanding its business through new licenses or buyouts. The Zacks Consensus Estimate for 2022 bottom line is pegged at $3.55 per share, up 5.3% in the past 60 days. IPAR has a Growth Score of A and a trailing four-quarter earnings surprise of 27.8%, on average.
Helmerich & Payne HP is engaged in the contract drilling of oil and gas wells in the United States & internationally. Its technologically-advanced FlexRigs are much in demand and it has upgraded most of its drilling feet with the latest technology. Meanwhile, customer acceptance of Helmerich & Payne's digitization efforts has led to cost reduction, improvement in efficiency and higher profits. The contract driller's low debt levels, on an absolute and relative basis, are also positive in this difficult operating environment. The Zacks Consensus Estimate for its fiscal 2023 earnings is pegged at $4.47 per share, up 20.2% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 124.2%, on average.
Forestar Group FOR is a residential lot development company and a major subsidiary of. D.R. Horton. The company’s fourth-quarter fiscal 2022 revenues amounted to $381.4 million on 3,914 lots sold. In fiscal 2022, FOR delivered more than 17,600 residential lots. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $2.77 per share, up 6.1% in the past 60 days. FOR has a Growth Score of B and a trailing four-quarter earnings surprise of 50.2%, on average.
WhiteHorse Finance WHF is a business development company focused on originating loans to privately held small-cap companies across various industries. The company reported results for the third quarter of 2022, with Net Asset Value amounting to $343 million or $14.76 per share. The company is benefiting from a rising interest rate environment. The Zacks Consensus Estimate for its 2022 bottom line is pegged at $1.55 per share, up 5.4% in the past 60 days. The company has a Growth Score of B.
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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.
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>Helmerich & Payne, Inc. (HP) : Free Stock Analysis Report
Forestar Group Inc (FOR) : Free Stock Analysis Report
Inter Parfums, Inc. (IPAR) : Free Stock Analysis Report
WhiteHorse Finance, Inc. (WHF) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
