To increase your chances of finding high-quality companies, you can do one thing: follow Benjamin Graham's recommendations. The father of value investing recommended investors look for stocks with a current ratio of more than two and a higher working capital than long-term debt. These stocks will most likely outperform their competitors.
The current ratio indicates whether the resources with which the balance sheet supports activities allow the company to pay off its short-term creditors. The ratio is a quotient where total current assets are the numerator and total current liabilities are the denominator.
When the difference between total current assets and total current liabilities (also known as working capital) surpasses the long-term debt, the balance sheet is robust enough that the company can continue its activities and refund its lenders.
In addition to the above criteria, these three stocks have also received positive recommendation ratings from sell-side analysts on Wall Street, ranging between hold and overweight. The last rating means that the stock is expected to outperform its industry or the entire market.
A. O. Smith
A. O. Smith Corp. (AOS, Financial) is a Milwaukee-based manufacturer and marketer of residential and commercial gas and electric water heaters, boilers, tanks and water treatment solutions in North America, Europe, China and India.
The stock has a current ratio of 2.06, which is higher than the industry median of 1.85.
A. O. Smith has a trailing 12-month working capital of $815 million and trailing 12-month long-term debt of $221.4 million as of the most recent full fiscal year.
GuruFocus assigned a very positive rating of 8 out of 10 for the company's financial strength and for its profitability.
A. O. Smith traded at a price of $45.43 per share on Jan. 24 for a market capitalization of $7.41 billion.
According to the Peter Lynch chart, the stock is not cheap.
Wall Street issued a hold recommendation rating and an average target price of $51.
Lancaster Colony
Lancaster Colony Corp. (LANC, Financial) is a Westerville, Ohio-based manufacturer and marketer of specialty food products for U.S. retail and foodservice markets.
The stock has a current ratio of 2.7, which is better than the industry median of 1.58.
Lancaster Colony has a trailing 12-month working capital of nearly $250 million and no long-term debt as of the most recent full fiscal year.
GuruFocus assigned a very positive rating of 7 out of 10 for the company's financial strength and a high rating of 8 out of 10 for its profitability.
The stock price traded at $163.13 per share at close on Friday for a market capitalization of $4.48 billion.
According to the Peter Lynch chart, the stock doesn't look cheap.
Wall Street recommends a hold rating and an average target price of $164.
Johnson Outdoors
Johnson Outdoors Inc. (JOUT, Financial) is a Racine, Wisconsin-based designer, manufacturer and marketer of camping, diving, watercraft and marine electronics products.
The company has a current ratio of 3.67, which is better than the industry median of 1.29.
Johnson Outdoors has a trailing 12-month working capital of $235 million and no long-term debt as of the most recent full fiscal year.
GuruFocus assigned a very high rating of 9 out of 10 for the company's financial strength and a high rating of 8 out of 10 for its profitability.
Johnson Outdoors traded at $76.16 per share at close on Friday for a market capitalization of $766.95 million.
According to the Peter Lynch chart, the stock is trading near its fair value.
Wall Street issued an overweight recommendation rating and an average target share price of $85.
Disclosure: I have no positions in any securities mentioned.
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