Proper identification of rightly-priced stocks is crucial for successful investing. However, in reality, correctly-priced stocks and overpriced toxic stocks are intertwined in such a way that it is tough 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 exceeds its true intrinsic value.
Investors are likely to gain from accurate 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 abandoning 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 12 toxic stocks that showed up on the screen:
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 has remained unchanged at a penny per share. 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 seven cents per share to eight cents. The stock currently has a Zacks Rank #3.
Maryland-based U.S. Silica Holdings, Inc. SLCA makes and markets commercial silica, a specialized mineral, to a variety of attractive end markets in the United States. Over the past 30 days, the Zacks Consensus Estimate for current-quarter loss has widened from five cents per share to seven cents. The stock currently has a Zacks Rank #3.
Hanover, MD-based The KEYW Holding Corporation KEYW is engaged in cyber security and cyber superiority solutions to defense, intelligence and national security agencies. Over the past seven days, the Zacks Consensus Estimate for current-quarter loss has remained unchanged at 2 cents per share. The stock has a Zacks Rank #3.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and backtesting software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
The KEYW Holding Corporation (KEYW) : Free Stock Analysis Report
U.S. Silica Holdings, Inc. (SLCA) : Free Stock Analysis Report
First Majestic Silver Corp. (AG) : Free Stock Analysis Report
Mattel, Inc. (MAT) : Free Stock Analysis Report
To read this article on Zacks.com click here.