Building a portfolio with stocks that have robust liquidity levels will likely work for 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.
Investors can consider adding stocks like Abercrombie & Fitch Co. (ANF – Free Report) , EverQuote, Inc (EVER – Free Report) , Sezzle Inc (SEZL – Free Report) and Peloton Interactive, Inc (PTON – Free Report) 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 six.
Here are four of the six stocks that qualified the screen:
Abercrombie & Fitch is a specialty retailer of premium, high-quality casual apparel for men, women and kids. The company has a vast network of 757 stores across North America, Europe, Asia and the Middle East. It operates a few e-commerce sites, including www.abercrombie.com, www.abercrombiekids.com, www.hollisterco.com and www.gillyhicks.com.
ANF’s performance is gaining from substantial growth across regions and brands, especially in the Americas and the Abercrombie brand. Backed by the strong first-half fiscal 2024 results, Abercrombie raised its sales and operating margin views for fiscal 2024. The company anticipates fiscal 2024 net sales to increase 12-13% from $4.3 billion reported in the prior year. It earlier expected net sales growth of 10% for fiscal 2024. However, the company’s fiscal 2024 is one week shorter than fiscal 2023. Abercrombie anticipates this lost selling week to reduce fourth-quarter sales by $80 million or 5.5 percentage points. For the fiscal year, the retailer expects sales impacts of $50 million or 1.2 percentage points.
The Zacks Consensus Estimate for its fiscal 2024 earnings is pegged at $10.26 per share, unchanged in the past 30 days. ANF has a Growth Score of A and a trailing four-quarter earnings surprise of 28%, on average.
EverQuote, headquartered in Cambridge, MA, is an online insurance marketplace. The company operates an online marketplace for consumers shopping for auto, home and renters, and life insurance through its Internet websites.
EverQuote is gaining from its exclusive data asset and technology, deepened focus on core P&C markets and a robust financial profile. These position it well for long-term growth. Recovery in automotive and other insurance verticals, given auto carrier recovery and growth in revenue per quote request, bodes well.
The Zacks Consensus Estimate for EVER’s 2024 bottom line is pegged at earnings of 57 cents per share, unchanged in the past 60 days. The company has a Growth Score of A and a trailing four-quarter earnings surprise of 144.9%, 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 60% year over year due to an increasing subscriber base. As of June 30, 2024, Sezzle had 462,000 active subscribers across Anywhere and Premium platforms.
Management raised the top and bottom-line outlook for 2024. It expects total revenue growth of 35-40% compared with 25% mentioned earlier. Earnings per share are expected to be $9.25 compared with $5.00 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.
Peloton Interactive operates as an interactive fitness platform with over 6 million members. The brand’s content is accessible through the Peloton Bike, the Peloton Tread and Peloton Digital, which provide a full slate of fitness offerings anytime, anywhere, through IOS and Android as well as most tablets and computers.
Recently, Peloton announced its seasonal retail collaboration with Costco. Under this partnership. PTON will be selling the Peloton Bike+ across 300 of Costco’s U.S. stores and on Costco.com this holiday season, beginning from Nov. 1. In the last reported quarter, revenues were almost flat year over year at $643.6 million. Subscription revenues surged 2%, while Connected Fitness Products revenues declined 4% year over year.
The Zacks Consensus Estimate for fiscal 2025 bottom line is pegged at a loss of 65 cents per share, unchanged in the past 30 days. PTON has a Growth Score of A and a trailing four-quarter earnings surprise of 4.95%, on average.
Get the remaining stocks on the list and start testing this and other ideas. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin and easy to use. Everything is in plain language. And it’s very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in and see what gems come out.
Click here to sign up for a free trial of the Research Wizard today.
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:
