Benjamin Graham, the father of value investing, suggested using specific financial strength criteria in order to have higher chances of finding quality companies. These characteristics include a current ratio of more than 2 and working capital that exceeds the long-term debt.
The current ratio indicates whether the balance sheet provides the company with sufficient margins to pay off its short-term creditors. It is calculated as total current assets divided by total current liabilities.
The working capital is the difference between total current assets and total current liabilities. A higher working capital than long-term debt is an indicator of a solid balance sheet. This means that the company has sufficient financial resources to keep the business up and fulfill its obligations towards lenders of long-term capital.
Below are three stocks that fulfill the above criteria and have positive ratings from Wall Street sell-side analysts.
Dassault Systemes
The first company with the above-listed criteria I found was Dassault Systemes SE (DASTF, Financial). Based in France, the company is a global provider of software solutions and services.
Dassault Systemes has a current ratio of 4.2, which is higher than the industry median of 1.75 and beats 84% of competitors.
Dassault Systemes SE has a trailing 12-month working capital of $5.93 billion and trailing 12-month long-term debt of almost $4 billion as of the quarter ended on Sept. 29, 2019.
GuruFocus assigned a rating of 5 out of 10 for the company’s financial strength and a rating of 9 out of 10 for its profitability.
Shares of Dassault Systemes SE were at around $165.00 per unit on Wednesday for a market capitalization of $43.54 billion.
Accoeding to the Peter Lynch chart, the stock is not cheap.
The price-book ratio is 7.39 versus the industry median of 2.96 and the price-sales ratio is 9.98 compared to the industry median of 2.22.
Wall Street issued an overweight recommendation rating for this stock.
Graco
The second company with the above-listed criteria I found was Graco Inc (GGG, Financial). Based in Minneapolis, Minnesota, the company is a global designer, manufacturer and marketer of specialty industrial machineries.
The stock has a current ratio of 2.69, which is higher than the industry median of 1.85 and beats 72.5% of competitors.
Graco has a trailing 12-month working capital of $485 million and trailing 12-month long-term debt of $192 million as of the most recent quarter ended on Sept. 29, 2019.
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.
Shares of Graco Inc were trading at a price of $52.51 per unit on Wednesday for a market capitalization of $8.76 billion.
The Peter Lynch chart suggests that the stock is not cheap.
The price-book ratio is 8.9 versus the industry median of 1.56 and the price-sales ratio is 5.49 versus the industry median of 1.08.
Wall Street recommends a hold rating for this stock.
Hollysys
The third company with the above-listed criteria I found was Hollysys Automation Technologies Ltd (HOLI, Financial). Based in Beijing, the company is a provider of automation and control technologies in China, Southeast Asia and the Middle East.
Hollysys has a current ratio of 3.39, which is higher than the industry median of 1.85 and beats 82.24% of competitors.
Hollysys’ trailing 12-month working capital was $763.2 million and its trailing 12-month long-term debt was $0.9 million as of the most recent quarter ended on Sept. 30, 2019.
GuruFocus assigned a rating of 9 out of 10 for the company's financial strength and a rating of 8 out of 10 for its profitability.
Shares of Hollysys Automation Technologies Ltd were trading at a price of $16.82 on Wednesday for a market capitalization of $1.01 billion.
According to the chart of Peter Lynch, the stock is trading cheaply.
The stock has a price-book ratio of 1.09 versus the industry median of 1.56 and a price-sales ratio of 1.85 versus the industry median of 1.08
Wall Street issued a buy recommendation rating for this stock.
Disclosure: I have no positions in any securities mentioned.
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