Scared to Invest? Try 3 Crisis-Proof Liquid Stocks - Investment Ideas
2014年2月12日 - 2:56AM
Zacks
Are you hesitant to invest in stocks amid the ongoing financial
instability and Federal Reserve's stimulus cut? Actually you should
be, given the downtrend in major U.S. indices so far this year. You
will, after all, be putting your hard-earned money at risk.
But you can turn the odds in your favor by applying the right
stock-picking strategy. All you have to do is take advantage of the
short-term turning points of stocks that have the capability of
tiding over possible challenges.
Before I discuss the strategy and handpick potential winners, let
us take a quick look at the stock market and its looming
threats.
Is the Magnitude of Market Correction
Reasonable?
It is believed that no clear direction of job data, barely
increased manufacturing, uncertainty related to home and auto
sales, and the latest upheaval in emerging countries have made the
benchmark indexes lose strength. While these are no doubt enough to
fade investors' bullish sentiment, the over-hyped magnitude of
market correction is far more than what might be considered
reasonable.
Actually, the economic data was not as strong as people expected
based on last year's progress. So a reassessment of individual risk
profile is keeping them away from the market for now.
Is Liquidity Management a Concern?
At least, the Fed's aggressive stance to reduce its stimulus
signals a better overall economic picture. While this should
translate into better investor sentiment, some negative factors
cannot be ignored.
The reduction of money supply will enhance the buying power of each
dollar and eventually translate into deflation. This will in turn
have a reverse effect on economic growth with the flight of real
interest rates. Further, failure on part of the economy to sustain
the achieved growth level or the Fed in reaching growth targets
will result in another liquidity crisis. And the outcome of a
crisis is still fresh in our memories.
Otherwise, the U.S. economy should not suffer much, as the outflow
of liquidity to emerging markets returns with increased demand for
money as a result of the Fed's scaling back of stimulus. The
withdrawal of capital to meet domestic demand has already started
hindering growth in emerging markets.
On the other hand, the debt ceiling issue has resurfaced: the
Treasury needs to raise the limit by the end of this month so as to
forestall the risk of default.
The Mantra
The fate of the economy and the stock market is highly dependent on
the Fed's successful liquidity management. If the stimulus is
withdrawn before the economy effectively recovers, another crisis
will be right around the corner. It all depends on the perspective
of the new Fed chief Janet Yellen. She will perhaps tone down the
aggressive stance given the lukewarm data. The semi-annual monetary
policy will give a clearer understanding of her standpoint.
Meanwhile, the debt-ceiling standoff is expected to be another
troublemaker.
So it's time to start making investment decisions considering the
worst-case scenario. Keeping the likely negatives in mind, one
should look for stocks that have the following features:
High Liquidity: This is the first thing to check, as
companies that are quite capable of covering their short-term
obligations will not falter even if the economy faces a liquidity
shortage. So companies with a high current ratio should fare well,
even if their profits get hurt.
Low Financial Leverage: Companies that depend less on
external borrowings for capital expenditures should be safer
choices, as the chance of a debt crunch cannot be ruled out. So you
should narrow down your list by finding companies that have very
small debt-to-equity ratios.
Ability to Utilize Equity and Assets: Highly liquid and
low leveraged companies that can effectively utilize their assets
and employed investor money to generate earnings should remain
buoyant despite external financial threats. So you should add high
return on assets (ROA) and return on equity (ROE) to your screening
criteria.
Reinvestment Ability: Earnings power is another important
measure in this strategy. Companies that are able to generate
higher profits on each dollar of sale should have the flexibility
to reinvest in their operations. So a healthy operating margin is
necessary to reduce dependence on external borrowing.
Favorable Zacks Rank: Stocks that hold a Zacks Rank #1
(Strong Buy) or 2 (Buy) have witnessed solid positive earnings
estimate revisions over the past few weeks. A favorable rank
indicates that analysts are optimistic about the earnings picture
of these companies despite potential challenges. This should
finally help you to zero-in on the right stocks.
(Click here to learn more about the Zacks Rank.)
3 Stocks Set to Gain Amid Liquidity Crunch
I ran a screen on Research Wizard with the following
parameters:
(Click here to sign up for a free trial to the Research Wizard
today.)
- Current ratio greater than or equal to 3: This will select
companies that are 3 times more capable to cover short-term
obligations.
- Debt-to-equity ratio less than or equal to 1%: This captures
stocks that have a low degree of financial leverage.
- ROA and ROE greater than or equal to 15%: This picks stocks
that are generating over 15% earnings by utilizing their equity
base and asset base separately.
- Operating margin greater than or equal to 20%: This identifies
stocks that have the flexibility to reinvest their pure profits, as
their costs are under control.
- Zacks Rank less than or equal to 2: This ascertains stocks that
have been witnessing solid earnings estimate revisions and are
poised to outperform. (See the performance of Zacks' portfolios and
strategies here: About Zacks Performance).
Here are the top 3 among the 5 stocks that I could extract from the
screen:
Alexion Pharmaceuticals, Inc. (ALXN):
Headquartered in Cheshire, Connecticut, this Zacks Rank #1
biopharmaceutical company is my top pick.
Current ratio = 3.75
Debt-to-equity ratio = 0.03%
Trailing 12-month ROA = 18.47%
Trailing 12-month ROE = 24.25%
Operating margin (Trailing 12 months) = 35.32%
Skyworks Solutions Inc. (SWKS): This provider of
analog semiconductors is my second choice. The company is
headquartered in Woburn, Massachusetts and currently carries a
Zacks Rank #2.
Current ratio = 7.12
Debt-to-equity ratio = 0.02%
Trailing 12-month ROA = 16.15%
Trailing 12-month ROE = 17.88%
Operating margin (Trailing 12 months) = 20.16%
Oracle Corporation (ORCL): This well-known
database and application software maker is my third choice. This
Redwood City, California-based tech database giant currently holds
a Zacks Rank #2.
Current ratio = 3.38
Debt-to-equity ratio = 0.51%
Trailing 12-month ROA = 15.16%
Trailing 12-month ROE = 28.52%
Operating margin (Trailing 12 months) = 33.61%
Don't Miss Good Entry Points
None of my screening parameters is dependent on the price
performance of these stocks. So you should add them to your watch
list first and wait for good entry points, as these fundamentals
will not change any time soon. In any case, these stocks will be
better performers given their funding self sufficiency.
However, take action before these strengths are reflected in the
stock prices. Don't wait too long!
Want More of Our Best Recommendations?
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about to be triggered and which of our experts has the hottest
hand. Then each week he hand-selects the most compelling trades and
serves them up to you in a new program called Zacks
Confidential.
Learn More
<http://www.zacks.com/registration/confidential/welcome/>
>>
Disclosure: The author has no positions in any stocks
mentioned.
AUXILIUM PHARMA (AUXL): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
SKYWORKS SOLUTN (SWKS): Free Stock Analysis Report
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