Creating a portfolio with favorable liquidity stocks is likely to work in favor of investors seeking healthy returns. Liquidity measures a company’s capability to meet short-term debt obligations. Stocks with high liquidity levels have always been in demand, owing to their potential to provide maximum returns.
Investors can consider adding stocks like American Superconductor Corporation AMSC, Frontdoor, Inc. FTDR, Sezzle Inc. SEZL and Vimeo, Inc. VMEO to their portfolios to boost returns.
However, one should be careful when investing in a stock with a high liquidity level, as it may also indicate that the company is failing to utilize its assets efficiently.
Apart from sufficient cash in hand, investors might also consider a company’s capital deployment abilities before investing in its stock. A healthy company with favorable liquidity may prove to 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. 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 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.
Screening Parameters
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 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 (Buy).
These criteria have narrowed the universe of more than 7,700 stocks to only five.
Here are four of the five stocks that qualified the screen:
American Superconductor Corporation is a provider of megawatt-scale power resiliency solutions. It develops and sells a wide range of products and solutions based on power electronic systems and high-temperature superconductor wires that improve the efficiency, reliability and quality of electricity during its generation, transmission, distribution and usage. It operates under two segments namely Grid and Wind.
In the last reported quarter, revenues came in at $54.5 million, up 60.3% year over year, driven by the acquisition of NWL and higher shipments of new energy power systems and electrical control system shipments. AMSC had $200 million in 12-month backlog and $300 million in total backlog.
Continued momentum across semiconductors, renewables, mining and metals and military end-markets bodes well. For the third quarter, AMSC expects revenues in the range of $55 million to $60 million.
The Zacks Consensus Estimate for fiscal 2024 earnings is pegged at 50 cents per share, up 61.3% in the past 30 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 328.2%, on average.
Frontdoor is the parent company of home service plan brands consisting of American Home Shield, HSA, Landmark and OneGuard. The company's customizable home service plans help customers protect and maintain their homes from costly and unplanned breakdowns of essential home systems and appliances.
In the last reported quarter, revenues came in at $540 million, up 3% year over year. The uptick was driven by a 4% increase in price, which was partly offset by a 1% decline from reduced volume. Further, the number of first-year Direct-to-Consumer home warranties was 271,000, up 3% sequentially. Gross margin expanded 550 basis points to 57% for the third quarter of 2024. The expansion was mainly driven by higher price and a shift to higher service fees.
It also concluded a $400 million share repurchase authorization in August 2024 and initiated a new 3-year, $650 million buyback authorization in September 2024.
The Zacks Consensus Estimate for 2024 earnings is pegged at $3.14 cents per share, up 12.5% in the past 30 days. FTDR has a Growth Score of B and a trailing four-quarter earnings surprise of 269%, on average.
Sezzle is a fintech company that operates a digital payment platform mainly across the United States and Canada. This platform offers customers interest-free installment plans at online stores and certain in-store locations. In the last reported quarter, revenues jumped 71.3% year over year due to an increasing subscriber base. As of Sept. 30, 2024, SEZL had 529,000 active subscribers across Anywhere and Premium platforms.
Management raised the top and bottom-line outlook for 2024 owing to strong growth and the inclusion of the newly launched banking program with WebBank. It expects total revenue growth of 55% compared with 35-40% mentioned earlier. Earnings per share are expected to be $12.05 compared with $9.25 stated earlier. The Zacks Consensus Estimate for 2024 earnings is pegged at $6.71 per share, unchanged in the past 60 days. The company has a Growth Score of A.
Vimeo 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. It has a more than 300-million strong user base. In the last reported quarter, revenues came in at $105 million, slightly down from $106 million reported in the prior-year quarter. Subscribers were up 26%, while average revenue per user was up 11% year over year.
The Zacks Consensus Estimate for 2024 earnings is pegged at earnings 14 cents per share, suggesting an improvement of 75% in the past 60 days. VMEO has a Growth Score of B.
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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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