Building a portfolio with stocks that have robust liquidity levels will likely work for investors seeking healthy returns. 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.
However, one should be careful about investing in a stock with a high liquidity level. High liquidity may also indicate that the company cannot utilize its assets competently.
Besides sufficient cash, an investor might also consider a company’s capital deployment abilities before investing. A healthy company with favorable liquidity may be a profitable pick for one’s portfolio.
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 — 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 indicate 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 — the ‘acid-test ratio’ or ‘quick assets ratio’ — indicates a company’s ability to pay short-term obligations. It considers inventory, excluding the current assets relative to current liabilities. A quick ratio of more than 1 is desirable, like the current ratio.
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 existing 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.
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.
We added our proprietary Growth Style Score to the screen to ensure these liquid and efficient stocks have solid growth potential.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (While liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization is more significant 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 handily beat other stocks when combined with a Zacks Rank #1 or 2.)
These criteria have narrowed the universe of more than 7,700 stocks to only four.
Here are four stocks that qualified for the screen:
Amphastar Pharmaceuticals AMPH is a specialty pharmaceutical company. It focuses on developing, manufacturing, marketing and selling generic and proprietary injectable and inhalation products. Its products include Enoxaparin Sodium Injection, Amphadase, Cortrosyn for Injection and prefilled disposable emergency syringes for crash cart use. The Zacks Consensus Estimate for 2023 earnings is pegged at $3.20 per share, up 17.6% in the past 60 days. AMPH has a Growth Score of B and a trailing four-quarter earnings surprise of 52.1%, on average.
Puma Biotechnology PBYI is a small cancer biotech whose only marketed product, Nerlynx (neratinib) was launched in the United States in late July 2017 for the treatment of early stage HER2-positive breast cancer in patients who have been previously treated with Roche’s Herceptin-based adjuvant therapy. The company’s sole marketed drug, Nerlynx, is contributing the majority of the revenues with consistent sales performance in the United States. The company has also acquired a clinical-stage candidate, alisertib, from Takeda. Ongoing studies focusing on alisertib’s potential to target breast and small-cell lung cancers are progressing well. The successful development of this candidate could significantly enhance PBYI’s position in the anticancer drug market and help to diversify its portfolio. The Zacks Consensus Estimate for its 2023 bottom line is pegged at 73 cents per share, suggesting an increase of 9% in the past 60 days. PBYI has a Growth Score of A and a trailing four-quarter earnings surprise of 76.6%, on average.
DropBox DBX is a service company that offers a platform that enables users to store and share files, photos, videos, songs and spreadsheets. The top line is benefiting from an expanding artificial intelligence (AI) driven product portfolio. At the end of third-quarter 2023, the company had 18.2 million paying users, reflecting a sequential increase of 130,000 net new paying users. A robust partner base, which includes Google, Zoom, Microsoft, Salesforce and NVIDIA, among others, bodes well. Dropbox expects revenues between $629 million and $632 million for the fourth-quarter 2023. The Zacks Consensus Estimate for its 2023 bottom line is pegged at $1.96 per share, suggesting an increase of 3.7% in the past 60 days. DBX has a Growth Score of B and a trailing four-quarter earnings surprise of 13.1%, on average.
Vimeo VMEO provides video software solutions. The company’s platform enables any professional, team and organization to unlock the power of video to create, collaborate and communicate. The Zacks Consensus Estimate for 2023 earnings is pegged at earnings of 8 cents per share, suggesting an improvement from a loss of 9 cents in the past 60 days. VMEO has a Growth Score of A and a trailing four-quarter earnings surprise of 122.7%, on average.
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Disclosure: Officers, directors and 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 mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.
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