Investors looking for high returns will likely benefit from adding stocks with sound liquidity levels, as liquidity encourages business growth.
Liquidity primarily determines a company’s capability to meet debt obligations by converting assets into liquid cash and equivalents. These stocks have always been on investors’ radar, owing to their potential to provide strong returns.
Investors should be alert before considering such stocks. While a high liquidity level may imply that the company is clearing its dues faster than its peers, it may also suggest that it cannot utilize its assets competently.
Hence, one may consider efficiency 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’ — reflects 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 11.
Here are four of the 11 stocks that qualified for the screen:
Cavco Industries CVCO designs and manufactures factory-built housing structures. The company’s products are sold under brands like Cavco Homes, Palm Harbor Homes, Friendship Homes, Fleetwood Homes, Fairmont Homes and Chariot Eagle. Cavco Industries is one of the prominent producers of park model RVs, vacation cabins and modular homes. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $24.05 per share, up 29.2% in the past 60 days. The company has a Growth Score of B and a trailing four-quarter earnings surprise of 50.4%, on average.
Cadence Design Systems CDNS offers products and tools that help customers design electronic products. The company’s performance is driven by strength across all segments owing to healthy demand for its diversified product portfolio. Frequent product launches and synergies from acquisitions are expected to help the company sustain top-line growth. Cadence recently acquired OpenEye Scientific Software, which is expected to improve revenues by approximately $40 million in fiscal 2023 and expand the company’s reach in pharmaceutical and biotechnology market. The company’s Palladium and Protium platform is gaining traction among clients in the hyperscale, AI/ML and server customers. Increasing investments in emerging trends like Internet-of-things (IoT), augmented and virtual reality (AR/VR) and autonomous vehicle sub-systems present significant growth opportunities. The Zacks Consensus Estimate for 2022 earnings increased 5.7% to $4.11 per share in the past 60 days. CDNS has a Growth Score of B. It has a trailing four-quarter earnings surprise of 9.8%, on average.
Pure Storage PSTG provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Pure Storage’s performance is driven by momentum in subscription services’ revenues and revenue growth in the domestic and international segments. Subscription services’ revenues benefit from the robust adoption of Evergreen subscription services and synergies from the Portworx acquisition. Strength in FlashArray and FlashBlade businesses and strong growth prospects in the data-driven markets of Artificial Intelligence (AI) and machine learning (ML) bode well. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at $1.18 per share, up 24.2% in the past 60 days. PSTG has a Growth Score of A and a trailing four-quarter earnings surprise of 171.8%, on average.
Lattice Semiconductor LSCC is a technology company that designs, develops and markets high-performance programmable logic devices and related development system software. The company is benefiting from momentum in strategic segments — communications and computing and industrial and automotive. Expanding product portfolio and strong customer demand bode well. The Zacks Consensus Estimate for its 2022 earnings is pegged at $1.67 per share, up 5% in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 13.1%, 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 that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Lattice Semiconductor Corporation (LSCC) : Free Stock Analysis Report
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