Precise identification of correctly-priced stocks is the key to successful investing. However, in reality, overpriced toxic stocks and the rightly-priced stocks are intertwined in such a manner that it is difficult to distinguish between the two.
Usually overhyped toxic stocks are vulnerable to external shocks. Moreover, these stocks are loaded with a large amount of debt. The price of these stocks is artificially inflated. Nonetheless, the higher price of toxic stocks is only transitory in nature as it is higher than its intrinsic value.
Investors are likely to gain from correct identification of toxic stocks with the help of an investing strategy called short selling. This strategy allows investors to sell a stock first and then buy it when price falls.
While short selling excels in bear markets, it typically loses money in bull markets.
So, accurately identifying toxic stocks and discarding or short selling those at the right time is the key to guard your portfolio from big losses.
Here is a winning strategy that will help you to identify overpriced toxic stocks:
Most recent Debt/Equity Ratio greater than the median industry average: 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 0: 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.
Here are four of the 27 toxic stocks that showed up on the screen:
Wilmington, DE-based Incyte Corporation INCY is a drug discovery company. Over the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has declined from $2.12 to $2.11. The stock currently has a Zacks Rank #5 (Strong Sell).
Leawood, KS-based AMC Entertainment Holdings, Inc. AMC operates as a theatrical exhibition company primarily in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter earnings has declined from 32 cents to 26 cents. The stock currently has a Zacks Rank #4 (Sell).
Covanta Holding Corporation CVA is a Morristown, NJ-based alternative energy company that provides waste and energy services in the United States and Canada. In the past 30 days, the Zacks Consensus Estimate for current-year earnings per share has declined from 10 cents to 5 cents. At present, the company has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Frederick, MD-based U.S. Silica Holdings, Inc. SLCA is a producer of industrial minerals, including sand proppants, whole grain silica, ground silica, fine ground silica, calcined kaolin clay and aplite clay. Over the past 30 days, the Zacks Consensus Estimate for the current quarter has declined from earnings of 8 cents to loss of 6 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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AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report
Incyte Corporation (INCY) : Free Stock Analysis Report
U.S. Silica Holdings, Inc. (SLCA) : Free Stock Analysis Report
Covanta Holding Corporation (CVA) : Free Stock Analysis Report
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