Creating a portfolio with favorable liquidity stocks is likely to favor 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.
One needs to be cautious before investing in such stocks. High liquidity may indicate that the company is clearing its dues faster than its peers. However, it might also suggest that the company cannot utilize its assets competently.
Hence, investors may consider a company’s efficiency level along with to its liquidity for identifying 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 ‘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.
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 high 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 seven.
Here are four of the seven stocks that qualified for the screen:
Chipotle Mexican Grill CMG, with its subsidiaries, operates quick-casual and fresh Mexican food restaurant chains. The company reported impressive first-quarter 2023 results, owing to strong comparable restaurant sales growth and new restaurant openings. Apart from its strong comparable restaurant sales growth, digital efforts, Chipotlane add-ons and menu innovation are other tailwinds. Strength in digital sales, rise in menu prices and higher restaurant-level operating margin have also been driving the company’s performance. The Zacks Consensus Estimate for CMG’ 2023 earnings has been revised upward to $43.48 per share from $41.38 in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 4.7%, on average.
Turkcell Iletisim Hizmetleri A.S TKC is one of the leading providers of mobile communications services in Turkey. In 2022, the company’s customer base comprised 887K homes with end-to-end fiber. Total fiber home passes stood at 5.4 million. The company’s net fiber additions stood at 234K subscribers for the full year. The net additions growth was driven by higher penetration of the company’s complementary and content-heavy TV+ service. The Zacks Consensus Estimate for its 2023 earnings is pegged at $1.11 per share, up 23.3% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 30.6%, on average.
Meta Platforms META is benefiting from steady user growth, particularly Asia Pacific. Increased engagement in products like Instagram, WhatsApp, Messenger and Facebook is likely to drive digital ad revenues. The company recently reported its first-quarter 2023 results, with revenues of $28.65 billion, up 2.6% year over year. The Rest of the World (RoW) revenues increased 10% on a year-over-year basis. The Asia-Pacific and the United States & Canada revenues increased 3.5% and 3% year over year, respectively. Revenues from Family of Apps (includes Facebook, Instagram, Messenger, WhatsApp and other services) increased 4% year over year to $28.31 billion. The Zacks Consensus Estimate for 2023 earnings is pegged at $11.76 per share, up 21.2% in the past 60 days. META has a Growth Score of B and a trailing four-quarter earnings surprise of 15.5%, on average.
Sea Limited SE is an internet service provider company based in Singapore. It offers digital entertainment, e-commerce and digital financial services known as Garena, Shopee and AirPay. The company operates primarily in Indonesia, Taiwan, Vietnam, Thailand, Philippines, Malaysia and Singapore. The Zacks Consensus Estimate for 2023 bottom line is pegged at $2.91 per share, up from 13 cents 60 days ago. SE has a Growth Score of B and a trailing four-quarter earnings surprise of 69.6%, on average.
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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 mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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