These Stocks Will Increase the Quality of a Portfolio
Benjamin Graham, a pioneer of value investing, suggested to use certain financial strength criteria when looking for stocks. In order to increase the chances of finding quality companies, the search should be focused on stocks that have the following characteristics:
A current ratio of more than 2.
A working capital that exceeds the long-term debt.
The current ratio tells whether the balance sheet provides the company with sufficient margins to satisfy its short-term creditors. It is calculated using total current assets divided by total current liabilities.
A working capital that exceeds long-term debt shows that the balance sheet is robust enough the company can keep running its activities fluently and honor all its financial obligations.
Below are some results of my search with the two criteria above, also taking into account Wall Street analyst recommendations of a positive rating ranging between overweight and buy, which corroborates expectations for higher share prices.
Lam Research
Headquartered in Fremont, California, Lam Research Corp. (NASDAQ:LRCX) designs and manufactures semiconductor processing equipment, which is used to produce integrated circuits.
The company has a current ratio of 3.61 as of June 28, which is above the industry median of 2.18. The current ratio of Lam Research is ranked higher than 617 competitors out of a total of 837 companies operating in the semiconductors industry.
According to GuruFocus, as of June 28, Lam Research' working capital of $6.2 billion is 1.6 times its total debt of $3.8 billion.
GuruFocus assigned a rating of 7 out of 10 for the company's financial strength and a rating of 9 out of 10 for its profitability and growth.
Shares of Lam Research closed at $227.7 on Tuesday for a market capitalization of about $32.98 billion. The stock has a price-earnings ratio of 16.6 versus the industry median of 20 and a price-sales ratio of 3.76 compared to the industry median of 1.56.
Wall Street recommends an overweight rating for shares of Lam Research with an average target price of $231.73.
Monster Beverage
Based in Corona, California, Monster Beverage Corp. (NASDAQ:MNST) is a developer and distributor of energy drinks and concentrates worldwide.
Monster Beverage has a current ratio of 3.3 as of June 28, which is above the industry median of 1.31. The current ratio is ranked higher than 82 competitors out of a total of 89 companies operating in the beverages - nonalcoholic industry.
According to GuruFocus, as of June 28, Monster Beverage's working capital is $1.62 billion. The company doesn't have long-term debt.
GuruFocus assigned the highest rating of 10 out of 10 for the company's financial strength and for its profitability and growth.
Shares of Monster Beverage closed at $55.88 on Tuesday for a market capitalization of approximately $30.45 billion. The stock has a price-earnings ratio of 29.1 versus the industry median of 21.68 and a price-sales ratio of 7.75 versus the industry median of 1.37.
Wall Street recommends an overweight rating for shares of Monster Beverage with an average target price of $66.56. The rating means the stock is expected to outperform either the industry or the entire market within a year.
SMC
Based in Tokyo, SMC Corp. (SMECF) specializes in the development of a broad range of control systems and equipment to support diverse applications in industrial automation.
As of June 28, the stock has a current ratio of 8.15 versus the industry median of 1.27. The stock's current ratio tops 1,783 companies out of a total of 1,845 competitors operating in the industrial products industry.
Based on the chart below, as of June 28, SMC's working capital of $7.8 billion is largely over total long-term debt of $70 million.
Further, GuruFocus assigned very high ratings of 9 out of 10 for the company's financial strength and 8 out of 10 for its profitability and growth.
Shares of SMC closed at $428.67 on Tuesday for a market capitalization of $28.96 billion. The stock has a price-earnings ratio of 27.38 compared to the industry median of 16.96 and a price-sales ratio of 5.65 versus the industry median of 1.01.
Wall Street issued a buy recommendation rating for shares of SMC with an average target price of approximately $430.51 as of Oct. 8.
Disclosure: I have no positions in any securities mentioned.
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This article first appeared on GuruFocus.
