5 Liquid Stocks For A Steady Flow Of High Returns

Investors always look for companies that are financially strong and thus have potential to perform steadily. Betting on a company’s liquidity, which is a good indicator of its financial position, serves their purpose well. A company with a higher level of liquidity can convert its assets into cash to pay short-term debt obligations faster than those with a lower level of liquidity.

However, a higher level of liquidity may not always mean that the company is financially strong. It may also indicate that the firm is failing to utilize its assets efficiently. Hence, in addition to companies with high liquidity, one may also search for efficient ones. A combination of efficiency and liquidity can lead to strong returns.

Ratios to Measure Liquidity

Liquidity ratios – Current Ratio, Quick Ratio and Cash Ratio – are primarily used to identify companies with strong liquidity.

Current Ratio: It measures current assets relative to current liabilities. This ratio is used for measuring a company’s potential to meet both short- and long-term debt obligations. Thus current ratio – also known as working capital ratio – below 1 indicates that the company has more liabilities than assets. However, a high current ratio does not always indicate that the company’s financial health is in the pink. It may also mean that the company failed to utilize its assets significantly. Hence, a range of 1 to 3 is considered ideal.

Quick Ratio: Unlike current ratio, quick ratio – also called “acid-test ratio" or "quick assets ratio" – indicates a company’s ability to pay short-term obligations. It considers inventory-excluded current assets relative to current liabilities. Like current ratio, quick ratio of greater than 1 is desirable.

Cash Ratio: This is the most conservative ratio among the three, as it takes into account only cash and cash equivalents, and invested funds relative to current liabilities. It only looks toward a company’s ability to clear current debt obligations using most liquid assets. Though cash ratio higher than 1 may point to a company’s sound financials, a high number may indicate inefficiency in using cash.

As evident, a ratio of greater than 1 is always desirable but may not always underline a company’s financial health.

Screening Parameters

In order to avoid selection of inefficient companies, we have added asset utilization, which is a widely used measure of a company’s efficiency, as one of the screening criteria. Asset utilization is a ratio of total sales over 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 called efficient.

In order to ensure that these liquid and efficient stocks have solid growth potential too, 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 of greater than 1 are desirable, stocks with high ratios may indicate inefficient companies.)

Asset utilization greater than industry average
(Higher asset utilization than industry average indicates a company’s efficiency.)

Zacks Rank equal to #1
(Only Strong Buy rated stocks can get through.)

Growth Style Score less than or equal to B

(Back-tested results show that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or #2 handily beat other stocks.)

Just these few criteria narrow down the universe of over 7,700stocks to only 12.

Here are five stocks that meet these criteria:

Logitech International SA (NASDAQ:LOGI) designs, manufactures and markets innovative peripherals that provide people with easy access to the digital world. Logitech International has an average four-quarter positive earnings surprise of more than 100%.

A10 Networks, Inc. (NYSE:ATEN) provides software-based application networking solutions that enable its clients to enhance, secure, and optimize the performance of their data center applications and networks. A10 Networks has an average four-quarter positive earnings surprise of 8.3%.

TriNet Group, Inc. (NYSE:TNET) is a provider of a comprehensive human resources solution for small-to-medium sized businesses. TriNet Group has an average four-quarter positive earnings surprise of 3.5%.

Corcept Therapeutics Incorporated (NASDAQ:CORT) is engaged in the discovery, development and commercialization of drugs for the treatment of severe metabolic, psychiatric and oncologic disorders. Corcept Therapeutics has an average four-quarter positive earnings surprise of 100%.

Antero Resources Corporation (NYSE:AR) is primarily engaged in the exploitation, development and acquisition of unconventional oil and liquids-rich natural gas properties. Antero Resources has an average four-quarter positive earnings surprise of more than 100%.

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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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