4 promising liquid stocks to grab for higher returns
A company with strong liquidity has the potential to deliver impressive returns, as liquidity supports the growth of its business.
Liquidity indicates the ability of a company to pay its debts by converting its assets into cash and cash equivalents. However, investors should be careful when investing in a stock with a high level of liquidity, as this may also imply that the company is not using its assets competently.
Therefore, it is advisable to consider a company’s level of efficiency in addition to its liquidity to identify potential winners. An efficient business with a favorable level of liquidity can prove to be a lucrative addition to one’s portfolio.
Measures to identify liquid inventory
Current Ratio: It measures current assets against current liabilities. This ratio is used to measure a company’s potential to service its short and long term debts. A current ratio – also called working capital ratio – below 1 indicates that the company has more liabilities than assets. However, a high cash ratio does not always indicate that the company is in good financial health. It may also suggest that the company has not used its assets significantly. Therefore, a range of 1 to 3 is considered ideal.
Quick report: Unlike the current ratio, the quick ratio – also called the “acid-test ratio” or the “quick asset ratio” – indicates a company’s ability to pay its short-term obligations. It considers inventories excluding current assets in relation to current liabilities. Like the current gear, a fast gear greater than 1 is desirable.
Cash ratio: This is the most conservative ratio of the three, as it takes into account cash and cash equivalents as well as invested funds versus current liabilities. It measures a company’s ability to honor its current debts using the most liquid assets. While a cash ratio above 1 may indicate healthy finances, a higher number may indicate inefficiency in the use of cash.
A ratio greater than 1 is desirable at all times, but may not always represent a company’s financial situation.
To choose the best of the lot, we’ve added asset utilization – a widely used measure of a company’s efficiency – as one of the selection criteria. Asset utilization is the ratio of total sales over the past 12 months to the average of the past four quarters of total assets. Although this ratio varies by industry, companies with a higher ratio than their respective industries can be considered efficient.
To ensure these liquid and efficient stocks have strong growth potential, we’ve added our proprietary growth style score to the screen.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3 (Although liquidity ratios greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization above industry average (A higher-than-industry-average asset utilization indicates a company’s efficiency.)
Zacks Rank equal to No. 1 (Only stocks rated Strong Buy can pass). You can see the full 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 Zacks rank #1 or 2 easily beat other stocks.)
These criteria narrowed the universe from more than 7,700 stocks to just seven.
Here are four of the seven stocks that qualified the screen:
Based in Lake Forest, IL, Packing Company of America PKG is the third largest producer of containerboard products and one of the leading producers of uncoated fine paper in North America. The company operates eight mills and 90 corrugated product manufacturing plants. Packaging Corporation continues to benefit from strong packaging demand supported by e-commerce and increasing food, beverage and drug packaging requirements. Zacks’ consensus estimate for its 2022 earnings is pegged at $10.47 per share, up 11.9% over the past 60 days. The company has a growth score of B and a trailing four-quarter earnings surprise of 22.8% on average.
Based in Nashville, Tennessee, Louisiana-Pacific Corporation LPX is a leading manufacturer of quality, durable engineered wood building materials, framing products, and exterior claddings for residential, industrial, and light commercial construction. Currently, the company operates 20 modern and strategically located facilities in the United States and Canada, two facilities in Chile and one in Brazil. It also operates facilities through a joint venture. The Company’s products are primarily used in new home construction, repair as well as renovation and outdoor structures. The company is benefiting from strong demand in the US residential market. Additionally, strategic business transformation, effective cash management and inorganic moves are likely to drive performance going forward. Zacks’ consensus estimate for 2021 earnings is pegged at $13.54 per share, up 1% over the past 60 days. Louisiana-Pacific has a growth score of A and a trailing four-quarter earnings surprise of 10.5% on average.
Based in Los Angeles, California, Houlihan Lokey HLI is a leading independent investment bank providing capital markets, mergers and acquisitions, financial restructuring and financial advisory and valuation services to clients including corporates, financial sponsors and agencies governments around the world. Houlihan Lokey recently completed the acquisition of GCA Corporation. The acquisition will help the company strengthen its M&A advisory services and expand its presence in the Asia-Pacific region. Zacks’ consensus estimate for fiscal 2022 earnings is pegged at $6.92 per share, up 9.5% over the past 60 days. The company has a growth score of A and a trailing four-quarter earnings surprise of 39.5% on average.
Based in Norway Equinor ASA EQNR is one of the world’s leading integrated energy companies, with operations spanning 30 countries. In Europe, the company is the second largest supplier of natural gas. Equinor is also a leading seller of crude oil. Over the years, the company has developed its expertise to expand upstream operations outside of conventional offshore resources to prolific shale oil and gas deposits. To combat climate change, the integrated energy company actively invests in renewable energy projects, including power generation from solar and wind power. Zacks’ consensus estimate for 2021 earnings is pegged at $3.28 per share, up 5.8% over the past 60 days. The company has a growth score of A.
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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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.
Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.
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