On a regular basis, many of us receive requests to consider different opportunities for investments, collaborations, and other endeavors that may require our time and money. Sometimes we jump right in and immediately write the check, and/or make time for the new activity. Other times, we sit on the request and then choose to hold out for a better opportunity. It takes a certain amount of confidence, patience and trust that the right opportunity is around the corner, and that it is fine to decline. And more than likely, what we have been waiting for comes along in time.
With this in mind, we looked for companies that appear to be well-positioned for the right opportunity: profitable mid caps that have a stockpile of cash. When a company has a high level of liquidity, it has the ability to make strategic acquisitions or self-fund new ventures. Further, its profitability allows it to continue to add to the coffers or re-invest in the company. If mid cap stocks with these attributes appeal to you, then you will like the list below.
The Current ratio is a liquidity ratio used to determine a company's financial health. The metric illustrates how easily a firm can pay back its short obligations all at once through current assets. A company that has a Current ratio of one or less is generally a liquidity red flag. Now, this doesn't mean the company will go bankrupt tomorrow, but it also doesn't bode well for the company, and may indicate that it could have an issue paying back upcoming obligations.
The Quick ratio measures a company's ability to use its cash or assets to extinguish its current liabilities immediately. Quick assets include assets that presumably can be converted to cash at close to their book values. A company with a Quick ratio of less than 1 cannot currently pay back its current liabilities. The Quick ratio is more conservative than the Current ratio because it excludes inventory from current assets, since some companies have difficulty turning their inventory into cash. If short-term obligations need to be paid off immediately, sometimes the Current ratio would overestimate a company's short-term financial strength. In general, the higher the ratio, the greater the company's liquidity (i.e., the better able to meet current obligations using liquid assets).
Return on Assets (ROA) illustrates how much a company is generating in earnings from its assets alone. This metric gives investors a picture of how profitable the company is relative to the assets in current possession. As well, it lets investors see how efficient and effective management is at generating earnings from the company's assets. While most management teams can probably make money by throwing money at an issue, very few can make very large profits with little investment.
The Operating Profit Margin is a profitability ratio that measures the effectiveness of the company's operating efficiency. This metric allows investors to see how much profit is left after all variable costs are covered. If the company's margin is increasing over time, this means that it's earning more per dollar of sales. Finding trends in the Operating Profit Margin helps investors identify companies that are improving profitability over time and managing the economic landscape better than their competitors.
We first looked for mid cap stocks. We then screened for businesses that have a substantial amount of cash on hand (Current Ratio>2)(Quick Ratio>2). We next screened for businesses that have strong profitability relative to their asset base (ROA [TTM]>10%)(1-year operating margin>15%). We did not screen out any sectors.
Do you think these mid cap stocks should be trading higher? Use our screened list as a starting point for your own analysis.
1) ResMed Inc. (RMD)
|Industry||Medical Appliances & Equipment|
|Return on Assets||12.12%|
|Operating Profit Margin||21.51%|
ResMed Inc., through its subsidiaries, engages in the development, manufacture, and distribution of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders. It offers various products for the treatment of obstructive sleep apnea and other respiratory disorders, including airflow generators, diagnostic products, mask systems, headgear products, and ventilation devices, as well as other optional accessories, such as cold passover humidifiers, carry bags, and breathing circuits. ResMed Inc. was founded in 1989 and is based in San Diego, California.
2) Waters Corp. (WAT)
|Industry||Medical Appliances & Equipment|
|Return on Assets||15.57%|
|Operating Profit Margin||28.27%|
Waters Corporation, an analytical instrument manufacturer, designs, manufactures, sells, and services high performance liquid chromatography, ultra performance liquid chromatography, and mass spectrometry technology systems and support products primarily in the United States, Europe, Japan, and Asia. Waters Corporation was founded in 1958 and is based in Milford, Massachusetts.
3) Syntel, Inc. (SYNT)
|Industry||Information Technology Services|
|Return on Assets||24.74%|
|Operating Profit Margin||26.45%|
Syntel, Inc. provides information technology and knowledge process outsourcing services worldwide. It operates in four segments: Applications Outsourcing, KPO, e-Business, and TeamSourcing. The company was founded in 1980 and is headquartered in Troy, Michigan.
*Company profiles were sourced from Google Finance and Yahoo Finance. Financial data was sourced from Finviz on 10/11/2012.