Adopting a strategy that has the potential to yield impressive returns during any market conditions might be a great way to start 2017. One may build a portfolio of stocks with favorable liquidity to achieve the above objective. Liquidity indicates a company’s capability of meeting its debt obligations by converting its assets into liquid cash and equivalents.
Measures to Identify Liquid Stocks Companies with favorable liquidity levels are generally speculated to have impressive business growth, which in turn has a positive impact on their price performance. However, one should be careful about investing in a stock with a high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock.
Current, quick and cash ratios are considered as the main pointers of the liquidity level of a company. Current ratio or working capital ratio indicates a company’s potential to meet both short- and long-term debt obligations by measuring current assets relative to current liabilities. Contrastingly, the quick ratio or acid-test ratio or quick assets ratio only seeks to measure a company’s ability to pay short-term obligations. Due to this, current assets excluding inventory are considered in calculating the quick ratio.
Separately, the cash ratio – the most conservative of the three ratios – indicates a company’s potential to convert its most liquid assets to pay current debt obligations. This is the reason why it only considers cash and cash equivalents relative to the company’s current liabilities. Values of all these ratios above 1 signal that the company is in good financial shape. However, high values of these ratios may also indicate that the company has failed to utilize its assets significantly. Hence, we consider liquidity ratios between 1 and 3 for healthy choices.
Screening Parameters
In order to avoid selection of inefficient companies, 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 a 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 called efficient.
In order to ensure that these liquid and efficient stocks have solid growth potential too, 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)
(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.)
(Higher asset utilization than the industry average indicates a company’s efficiency.)
Growth Style Score less than or equal to BZacks 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.)
(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700stocks to only eight.
Here are five stocks from the list:
Imperva, Inc. (IMPV - Free Report) is engaged in the development of protection software and services for business applications and databases. Imperva has a Growth Style Score of ‘A’ and an average four-quarter positive earnings surprise of 18.1%.
La-Z-Boy Incorporated (LZB - Free Report) is one of the largest furniture makers in the U.S. La-Z-Boy has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 5.7%.
Intevac, Inc. (IVAC - Free Report) is a leading supplier of static sputtering systems and related manufacturing equipment. Intevac has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 41.6%.
The Children's Place, Inc. (PLCE - Free Report) is a specialty retailer of apparel and accessories for children from newborn to twelve years of age. Children's Place has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 36.3%.
EnerSys (ENS - Free Report) is a global leader in stored energy solutions for industrial applications. EnerSys has a Growth Style Score of ‘B’ and an average four-quarter positive earnings surprise of 3%.
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by Zacks Equity Research
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