5 Toxic Stocks to Remove from Your Portfolio or Play Short
Accuracy in distinguishing overhyped stocks from the fairly priced ones leads to profitable investing. In a complicated market place, the overpriced stocks and the correctly priced ones are intermixed in such a way that differentiating between the two is a tough task. Nonetheless, figuring out bloated toxic stocks on a consistent basis and discarding them at the right time is the key to successful investing.
Usually, toxic companies are characterized by a high debt burden and are vulnerable to external shocks. The hype associated with the irrationally high-priced toxic stocks is usually short-lived as their intrinsic value falls short of their current price. These toxic stocks are sure to result in loss for investors over time.
Elevated price levels of these stocks can be due to either an irrational exuberance associated with them or some serious fundamental lacunae. If you own such overhyped stocks for a long period of time, you are bound to see huge loss of wealth.
However, if you can correctly pick such toxic stocks, you may gain by resorting to an investing strategy called short selling. This strategy allows you to sell a stock first and then buy it when the price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, just like picking stocks with huge growth potential, figuring out toxic stocks and abandoning them at the right time is the key to shield your portfolio from big losses or make profits by short selling them.
Screening Criteria
Here is a winning strategy that will help you identify overhyped toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: A high debt/equity ratio implies high leverage. High leverage indicates a huge level of repayment that the company has to make in connection with the debt amount.
P/E using 12-month forward EPS estimate greater than 50: A very high forward P/E implies that a stock is highly overvalued.
% Change in F (1) and F (2) Estimate (12 Weeks) less than -5: Negative EPS estimate revision for this and the next fiscal year during the past 12 weeks points to analysts’ pessimism.
Zacks Rank more than or equal to #3 (Hold): We have not considered Buy-rated stocks that generally outperform the market. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are five of the 14 toxic stocks that showed up on the screen:
Abercrombie & Fitch Co. ANF is a New Albany, OH-based specialty retailer. Over the past one-month period, its current year estimate has changed from a gain of 17 cents to a loss of 2 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Live Nation Entertainment, Inc. LYV is a Beverly Hills, CA-based live entertainment company. Over the past one-month period, its current year loss estimate widened from 13 cents to 17 cents. The stock currently has a Zacks Rank #3.
Bonita Springs, FL-based Herc Holdings Inc. HRI provides equipment rental suppliers primarily in North America. Over the past 60-days period, its current year estimate changed from a gain of 17 cents to a loss of a penny. The stock currently has a Zacks Rank #5.
The Woodlands, TX-based Conns Inc. CONN is a specialty retailer, which currently operates retail locations in Texas and Louisiana. Over the last 30 days, its current year estimate widened from a loss of 41 cents to a loss of 52 cents. Conns carries a Zacks Rank #3.
Boston, MA-based, Vertex Pharmaceuticals Incorporated VRTX is a bio-technology company. Over the past one-month period, the current year loss estimate widened from 23 cents to 25 cents. The stock currently has a Zacks Rank #3.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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LIVE NATION ENT (LYV): Free Stock Analysis Report
VERTEX PHARM (VRTX): Free Stock Analysis Report
ABERCROMBIE (ANF): Free Stock Analysis Report
CONNS INC (CONN): Free Stock Analysis Report
HERC HOLDINGS (HRI): Free Stock Analysis Report
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