Proper identification of rightly-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 huge 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 true intrinsic value.
Investors are likely to gain from precise 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, precisely figuring out toxic stocks and discarding or short selling those at the right time is the key to safeguard 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 16 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-quarter earnings per share has declined from 44 cents to 43 cents. The stock currently has a Zacks Rank #5 (Strong Sell).
Vancouver, Canada-based First Majestic Silver Corp. AG is engaged in the production, development, exploration, and acquisition of silver mines in Mexico. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss per share has widened from a penny to 4 cents. The stock currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
El Segundo, CA-based Mattel, Inc. MAT is the world’s largest manufacturer of toys. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss has widened from 32 cents per share to 33 cents. The stock currently has a Zacks Rank #3.
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 current-quarter loss per share has remained unchanged at 8 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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Incyte Corporation (INCY) : Free Stock Analysis Report
U.S. Silica Holdings, Inc. (SLCA) : Free Stock Analysis Report
First Majestic Silver Corp. (AG) : Free Stock Analysis Report
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