Building a portfolio with stocks that have robust liquidity levels will likely work in favor of investors seeking healthy returns, especially in the current volatile market scenario.
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 high liquidity. High liquidity may also indicate that the company cannot utilize its assets competently.
Besides having sufficient cash, an investor might also consider a company’s capital deployment abilities before investing in the stock. 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.
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 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).
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 five.
Here are four of the five stocks that qualified for the screen:
Dr. Reddy’s Laboratories Limited RDY is an integrated global pharmaceutical company that has been providing affordable and innovative medicines since 1984. The company markets its products in the United States, the U.K., Germany, India, Russia, Venezuela, Romania and South Africa. Dr. Reddy’s beat earnings and sales estimates in first-quarter fiscal 2024, driven by new product launches. It has witnessed healthy growth across its branded and global generics markets, especially in North America, the EU and Emerging markets. Dr. Reddy’s has a strong generic pipeline, with ANDA and drug master filings expected to roll out in future quarters. The company recently divested non-core brands to focus on its core business, which is encouraging. The Zacks Consensus Estimate for RDY’s fiscal 2024 bottom line is pegged at $3.74 per share, up 10% in the past 60 days. The company has a Growth Score of B.
Surmodics Inc SRDX is a leading provider of medical device and In Vitro Diagnostics (IVD) technologies to the healthcare industry. It reports through two segments — Medical Devices and IVD. Surmodics’ top line in third-quarter fiscal 2023 was driven by product sales growth from the Medical Device business. Robust thrombectomy suite and efforts to boost research and development augur well. A strong liquidity position is an added plus. The Zacks Consensus Estimate for fiscal 2023 earnings is pegged at a loss of 22 cents per share compared with a loss of $1.84 60 days ago. SRDX has a Growth Score of A and a trailing four-quarter earnings surprise of 71.2%, on average.
Fluor Corporation FLR provides engineering, procurement, construction and maintenance services (EPCM) through several subsidiaries. Fluor also provides operation and maintenance services to major industrial clients. The company’s second-quarter earnings and revenues increased year over year, given the solid demand for its engineering and construction solutions. Substantial contributions from the Energy Solutions and Urban Solutions segments aided the results. Fluor’s total new awards rose compared with the year-ago period. New awards also demonstrate that clients are moving forward with capital spending plans in a challenging business environment. Given the strong underlying performance of the company’s non-legacy portfolio and large Energy Solutions projects, Fluor lifted its expectations for 2023. The Zacks Consensus Estimate for Fluor’s 2023 earnings has been revised upward to $1.98 per share from $1.74 in the past 60 days. The company has a Growth Score of B.
NVIDIA Corporation NVDA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. The company recently reported robust second-quarter fiscal 2024 results, wherein the top and bottom lines beat the respective Zacks Consensus Estimate and marked a significant year-over-year improvement. The performance was driven by strong revenue growth across its datacenter end market, which mainly benefited from increasing investments in generative AI. The company’s Datacenter business is driven by the growing adoption of cloud-based solutions amid the growing hybrid working trend. The strong demand for its chips from large cloud service and consumer internet companies also aided the segment’s top-line growth in the second quarter. The Zacks Consensus Estimate for its fiscal 2024 bottom line is pegged at $10.46 per share, suggesting an improvement of 36.6% in the past 60 days. NVDA has a Growth Score of A and a trailing four-quarter earnings surprise of 9.8%, on average.
Dr. Reddy’s Laboratories Ltd (RDY): Free Stock Analysis Report
This article originally appeared on Zacks
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